Spreadtrum Communications - The Board Has Negotiated A Fair Deal For Shareholders

Shareholders in Spreadtrum Communications (NASDAQ:SPRD) have had a great summer so far. The fabless semiconductor company has agreed to sell itself to Tsinghua Unigroup. The board has negotiated a more than fair deal for its shareholders. If I were a shareholder, I would tender my shares at $31 after being offered a generous premium for my holdings.

The Deal

Spreadtrum announced that it has reached an agreement with Tsinghua Unigroup, under which the fabless semiconductor company will sell itself for $31.00 per American Depositary Share. According to the press release, Spreadtrum -- which provides mobile chipsets for 2G, 3G, 4G, and wireless communication standards -- sees its equity being valued around $1.78 billion.

The integrated, efficient chips manufactured by Spreadtrum allow manufacturers to build in the chips with small lead times at attractive costs. Chairman and CEO Zhao Weiguo commented on the rationale behind the deal:

We believe Spreadtrum and Tsinghua Unigroup will supplement each other and create enormous synergies inChina and abroad. Spreadtrum's capable and talented management team will be encouraged to continue their strong performance and innovative corporate culture, while Tsinghua Unigroup is in the unique position to offer unique expertise in consumer products, protection and support from a vast IP portfolio, and unique access to important capital markets in China.

Spreadtrum generated annual revenues of around $725 million for 2012, up 7.6% on the year before. Net income fell by 30.5% to $93.3 million in the meantime. Spreadtrum ended its most recent quarter with $168.4 million in cash, equivalents, and short-term investments. The company operates with $94.1 million in total debt, for a net cash position of around $74 million.

Adjusted for the net cash position, the company is valued around $1.70 billion. This values the operating assets of Spreadtrum at around 2.3 times annual revenues and 18 times annual earnings. The board of directors has already approved the merger agreement. The deal is subject to shareholder approval, regulatory approval, and normal closing conditions.

No Surprise

The news doesn't come as a complete surprise. On June 21, Spreadtrum Communications announced that it had received an acquisition proposal from Tsinghua. At the time, the company was willing to pay $28.50 per ADR. In recent weeks, the board of directors took the time to review and evaluate the proposal. Looking back in time, it seems as if the board was attracted to a possible sale. Directors have done a good job for shareholders by selling the company at $31.00 per share, some 9% higher from the initial offer.

Some Historical Perspective

Shares of Spreadtrum were trading as low as $1 at the end of 2008 and the start of 2009. Shares steadily recovered to the high $20s at the end of 2011 and have traded in a $15-$25 trading range ever since. After Spreadtrum reported its second-quarter results, shares traded around $18 halfway through May. Shares jumped toward $26 in June on the back of the news of the initial attempt of Tsinghua to acquire the company. The new $31 offer represents a premium of 72% over the levels halfway through May.

Investment Thesis

It seems as if everybody gets a fair deal over here. The board of Spreadtrum did a good job for its shareholders by negotiating an offer that is $2.50 higher from the initial takeover attempt. In all, shareholders receive a fair value at 18 times last year's earnings. Investors who participated in the public offering of the firm have seen a good, but volatile, ride.

Shares were sold to the general public at $14 per share back in 2007. Shares quickly fell to levels below a dollar a year later. The $31 offer means that investors more than doubled their investments in six years' time, which is quite attractive. Spreadtrum, which serves giants such as HTC and Samsung Electronics, will be able to make use of Tsinghua University's intellectual portfolio, giving the company greater IP protection. CEO Weiguo of Tsinghua expects to generate significant synergies on top of this as well.

In all, it seems like a fair deal for all parties involved. The board has done its job well, looking after its shareholders. As the board has already approved the deal, a higher offer seems unlikely and investors are best advised to tender their holdings. With shares trading at all-time highs, everybody is a winner.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.