COMPUTERS: SMIC Joins Group Buying Stats ChipPac
Bottom line: A new alliance between SMIC and a leading Chinese chip tester in the buyout of Singapore’s Stats ChipPac could be the latest signal of a Beijing-led drive to consolidate China’s chip sector.
The semiconductor world is buzzing today on news that a Jiangsu-based company will buy Singaporean semiconductor chip maker Stats ChipPac (Singapore: STAT), but what caught my attention was the name of leading Chinese chip maker SMIC (HKEx: 981; NYSE: SMI) as a member of the buyer group. I’ve been saying for many years now that China’s semiconductor sector is sorely in need of consolidation, but that such an overhaul is often blocked by the local stakeholders who often eschew mergers as they look after their own interests.
But this new tie-up that will bring together SMIC and Jiangsu Changjiang Electronics Technology (JCET) (Shanghai: 600584) in a buyout group for Stats ChipPac could be a sign that change is in the air and perhaps consolidation could finally be coming. Of course I’ve predicted such consolidation before for chip manufacturers, only to be disappointed. But other signals coming from the related chip design sector indicate that perhaps Beijing is finally intervening in a bid to build up some major domestic players that can challenge the likes of Intel (Nasdaq: INTC) and Qualcomm (Nasdaq: QCOM).
According to the latest reports, JCET and its partners have offered to buy Stats ChipPac for $780 million. (English article) Both companies are engaged in the “back end” part of chip manufacturing, meaning they conduct final testing and assembly work for microchips that are produced at other, higher-tech plants. The reports say that following its initial non-binding offer, JCET will have 30 days to negotiate a final deal to buy the money-losing Stats ChipPac.
Stats ChipPac is currently 84 percent owned by Temasek, Singapore’s largest sovereign wealth fund. Stats ChipPac shares have risen by more than 70 percent since May, when it first announced it had been approached by a potential buyer. The latest reports say other suitors who considered buying the company include global leader Advanced Semiconductor Engineering (NYSE: ASX) and China’s Tianshui Huatian Technology.
This particular deal was first disclosed in November, when JCET announced its plan to buy Stats ChipPac for S$0.452 per share, representing a 22 percent discount to its price at the time. So this latest news is moving the deal one step closer to completion.
One new element in this latest step is the inclusion of SMIC in the buying group, together with a new IC Fund set up earlier this year by Beijing to help invest in and consolidate the industry. SMIC announced its own participation, as well as the IC Fund’s, in a public filing to the Hong Kong stock exchange. SMIC said it would contribute $100 million to the buyout, accounting for about 15 percent of the total purchase price. (HKEx announcement) SMIC added that its agreement includes an option to sell the investment at a later date.
Unlike JCET and Stats ChipPac, SMIC engages in the higher-tech “front-end” production of microchips. Thus the new Changjiang-Stats ChipPac alliance would be complementary to SMIC’s current business, providing a strategic back-end manufacturing partner. The presence of the Beijing-backed IC Fund in the mix also hints that central forces could be at play behind the scenes, encouraging this kind of tie-up to drive consolidation.
We saw similar signs of Beijing-encouraged consolidation earlier this year in the chip design sector, when a company based out of the prestigious Tsinghua University bought 2 mid-sized players and merged them. It then brought in global giant Intel as a strategic investor, valuing the new company at $7.5 billion. That said, perhaps this new deal could be paving the way for a similar series of tie-ups in the chip manufacturing space, giving companies like SMIC the larger scale they would need for their ultimate goal of someday challenging the current dominance of companies like Intel and Taiwan’s TSMC (Taipei: 2330; NYSE: TSM)
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