Solomon Systech in buy-in talks with equity funds
CVC Capital and Carlyle among groups eyeing chip designer
Solomon Systech (International), a video-display chip designer, is talking to buyout fund CVC Capital Partners, Carlyle Group and other private equity funds about selling a stake in the Hong Kong-listed company, market sources said.
The talks for up to a controlling stake are being held despite the fact that Solomon's managing director, Humphrey Leung Kwong-wai, said last month the company was not actively seeking strategic investors.
Should any deal become a transaction for a controlling stake, its value would be at least US$111 million. Solomon declined to comment. CVC did not return telephone calls seeking comment while Carlyle declined to comment.
Buyout firms try to improve the performance of the companies they buy by cutting costs or shedding non-core units. Once that is accomplished they aim to sell the company at a price higher than what they paid. The industry generally targets a return on investment of 25 per cent.
Solomon's net profit last year dropped 71 per cent to US$22.4 million compared with US$76.3 million in 2005 on the decline in global chip prices.
Chip prices dropped 26 per cent last year as demand slowed, the company said at its results announcement on March 26. Any upturn in its results this year was expected to be gradual, the company said in a statement to the Hong Kong stock exchange on Friday.
Macquarie equities analyst Jessica Chang downgraded the company's stock to 'underperform' from 'neutral' the day after the results were announced, saying its near and medium-term prospects were bleak.
Shares in Solomon are down 0.83 per cent this year compared with a 1.89 per cent rise in the Hang Seng Index. The shares trade at 13 times expected earnings for this year.
Solomon's clients include Motorola, the second-largest mobile-telephone maker in the world, and Sony Ericsson, the fourth-largest.
The firm's 'e-paper' chips are used in Motorola's low-end Motofone handsets. Solomon also makes the organic light-emitting diodes and thin film transistor display chips mobile telephones require.
Firms listed in Hong Kong, Taiwan and Singapore have become more of a target for private equity funds as acquiring mainland companies - a main strategy that attracted funds to the region in the first place - has proved difficult. Beijing has heightened scrutiny of sales to foreigners amid rising nationalism and accusations that such assets are sold too cheaply.
As the mainland's economy continues to grow, company founders that were engaged in stake sale talks were demanding higher valuations than funds were willing to pay, market observers said.
United States-based buyout firm Kohlberg Kravis Roberts said this month that its unit, Precision Capital, would pay S$1 billion (HK$5.15 billion) for Singapore-listed MMI Holdings, which makes components parts for hard-disk drives.
US-based private equity fund Warburg Pincus last month paid US$175 million for a 20 per cent stake in Titan Petrochemicals Group, a Hong Kong-listed crude oil carrier.
Warburg in February last year paid US$150 million for just under 10 per cent of Gome Electrical Appliances Holding, the largest electronics retailer in the mainland which trades in Hong Kong.
