DJ GOING PUBLIC: A Primer For Agere Systems' IPO
20 Mar 14:09
By Raymond Hennessey
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Even in an active IPO market, Agere Systems Inc. would
be the week's highlight.
It's a tough deal to miss. At an estimated value of $6.5 billion, it is the
second-largest domestic initial public offering ever.
It's also pretty complicated.
So, here's a rundown of the key issues.
What is Agere?
Agere, based in Allentown, Pa., is the optoelectronics unit of Lucent
Technologies Inc. (LU) It's basically in the semiconductor business, making
communications chips. In its fiscal 2000, ended Sept. 30, Agere, as a Lucent
unit, booked $4.71 billion in revenue, above the $3.7 billion in sales in the
previous year. But Agere lost $76 million in fiscal 2000, compared with net
income of $351 million in fiscal 1999.
Agere has said that it's seeing a slowdown this quarter, as a result of the
U.S. economic conditions that have addled most large networking and
communications companies.
What are the terms of the IPO?
Here's where it gets tricky. The offering is for 500 million shares at
between $12 to $14 a share, in a deal led by Morgan Stanley Dean Witter Inc. At
the midpoint of the range, the deal would be the second-largest domestic IPO
ever, behind last year's more than $9 billion IPO of AT&T Wireless Group (AWE).
Agere itself isn't getting all the proceeds, since it is selling just 300
million shares. Morgan Stanley plans to sell the remaining 200 million. Morgan
Stanley is taking the unusual step of selling 40% of the shares in the deal
because it has been buying some Lucent debt over the past few weeks. As of
March 13, Morgan Stanley held $2,342,500,000 worth of Lucent commercial paper
at yields ranging from 7.03% to 8.92%, according to the latest Agere filing.
Morgan Stanley has paid $2,334,324,502 for that paper.
Sometime before the IPO, Lucent will issue Morgan Stanley shares of Agere as
partof the agreement Morgan Stanley entered to buy the debt. Morgan Stanley
will then sell those shares in the IPO.
What does Agere get out of this IPO?
At the midpoint of the range, Agere expects proceeds of $3.75 billion. It
doesn't have specific plans for the proceeds, short of using the new money for
working capital and other corporate purposes.
What does Lucent get from the deal?
Actually, quite a bit. Lucent has already sold a big chunk of its debt to
Morgan Stanley. In addition, it was able to use the Agere IPO as a way to
entice other banks to take part in its last credit facility. All but one of the
other underwriters in the deal took part in the Lucent facility.
The Agere IPO cleans up Lucent's balance sheet in another way. Once the deal
is done, Lucent is shifting $2.5 billion of its debt to Agere, since this is
the debt Lucent believes is attributable to Agere's business.
How about Lucent shareholders?
Lucent, which will own 62.5% of Agere after the IPO, has said it intends to
distribute its remaining shares in Agere to its own shareholders by Sept. 30.
The Internal Revenue Service has said the distribution will be tax-free to
Lucent holders.
What is the market sentiment around the IPO?
Right now, not good. But, in Agere's defense, the IPO market itself isn't
good. Few deals are getting done, and the ones that do make it more often than
not take significant price cuts, then see a selloff in the marketplace. Several
potential investors have said Agere's price might need to be cut to get them
interested.
Few of the major IPO analysts have said much positive about the Agere deal,
mostly because they believe that Agere, in the words of Irv DeGraw, research
director at WFN USA in Sarasota, Fla., is a "reasonably attractive firm with a
favorable outlook" coming "at the wrong time."
Many have questioned why the deal is even coming in this market. Randall
Roth, senior analyst at the IPO Plus Aftermarket Fund, has said it's a"fire
sale of some of (Lucent's) best assets," while David Menlow, president of
IPOfinancial.com in Millburn, N.J., said the deal's size is "a very scary
situation" that has the potential "to suck the oxygen out of the room" in the
IPO market.
Others are even harsher. George Nichols, an analyst with Morningstar.com in
Chicago, has likened the Agere IPO to the Mir station since both come from a
parent - Lucent and Mother Russia, respectively - that is "a shadow of its
former self" and both are likely to "crash and burn" this week. One analyst on
Wall Street used terms so harsh, the dashes that would be needed to publish it
on this newswire would make the description look like Morse code.
Still, while many analysts suggest avoiding the IPO, many of these same
players said it might be worth revisiting Agere as an investment down the road,
when the broader markets stabilize.
When will it come?
Right now, the IPO is expected to price after the close of trading Thursday,
with trading Friday. This could change, though.
-By Raymond Hennessey, Dow Jones Newswires; 201-938-5354;
raymond.hennessey@dowjones.com
(END) DOW JONES NEWS 03-20-01
02:09 PM |
