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Freescale May Hit the Selling Block

NEW YORK ( TheStreet) - After a big May 2011 IPO, majority private-equity owned Freescale Semiconductor (FSL - Get Report) and its battered shares may be a takeover target for a larger chip maker like Intel (INTC - Get Report), Qualcomm (QCOM - Get Report) and Texas Instruments (TXI).

In a Monday note, RBC Capital Markets analyst Doug Freedman raised his price target for Freescale Semiconductor from $15 to $20 on a "speculative risk rating" for the chip-maker on an eventual end to the company's earnings underperformance by 2013 and the possibility that an acquirer could look to buy the company outright.
Freescale Semiconductor may draw M&A interest from Intel, Qualcomm and Texas Instruments

"Freescale possesses attractive assets either in whole or in parts, which we see providing valuation support," writes Freedman in his Mar. 12 note. While Freescale's lossmaking ways, giant debt burden and falling revenue from mobile customers like Research In Motion (RIMM) make it an industry underperformer, the company's net operating loss carry forwards could be attractive to an acquirer like Intel or Qualcomm. "Larger credit worthy suitors could hypothetically absorb debt while leveraging Freescale NOLs for future tax advantages," adds Freedman though he notes no present M&A discussions.

The maker of embedded processors like microcontrollers and semiconductor products, Freescale was taken private by a consortium of private equity firms The Blackstone Group (BX), The Carlyle Group, Permira Advisers and TPG Capital in a 2006 leveraged buyout worth $17.6 billion. That buyout piled nearly $10 billion in debt onthe company, which it since pared to below $7 billion and is expected to further reduce be $150 million a quarter through 2013. That debt reduction and a turn to revenue growth could put Freescale into positive earnings territory of $2 a share by 2013.

Those prospective earnings and tax benefits embedded in a deal may pull a larger player into the deals market for Freescale's radio frequency or microcontroller products. Still risks remain. "At the end of the day, the magnitude of Freescale's debt makes our call heavily predicated on the health of the macro," notes Freedman. He expects growing earnings will minimize the debt drain that Freescale faces, causing EBITDA to expand 20% in 2013 to $1.1 billion, boosting free cash flow by 80%.

Another intrigue in a prospective deal would be the impact for Freescale's large minority investors, who didn't cash out on their stake in the company's May IPO, which raised over $1 billion to pay down debt. Currently, Blackstone, The Carlyle Group and TPG are Freescale's larest three shareholders with holdings worth roughly $3 billion each, according to Bloomberg compilations of filings with the Securities and Exchange Commission.
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