During Spreadtrum (SPRD)'s 2Q earnings conference call last Wednesday, Dr. Leo Li, Chairman and CEO, sounded noticeably happy and confident. He didn't even provide a guidance for the next quarter as the company has always done in the past. Because he knows for sure there is no next quarter. To be precise, Spreadtrum will have an awesome next quarter, and more after that, but existing shareholders won't be part of it. Instead, it seems shareholders will be pushed over like sheep in a slaughterhouse and gratefully vote "Yes" at the upcoming extraordinary general meeting on September 4 to give up their company. And a technology powerhouse will be taken private at a discounted price. Very discounted. I URGE shareholders to vote "No" at the extraordinary general meeting at any price lower than $34.50.
Spreadtrum is one of the largest fabless semiconductor providers in China with advanced technology in 2G, 3G and 4G wireless communications standards. The company is gaining market share rapidly at the expense of its global competitors. Tsinghua Unigroup is trying to take the company private in a buyout deal. Tsinghua Unigroup is a subsidiary of a solely state-owned corporation funded by Tsinghua University. Tsinghua will pay in all cash although it may finance a portion of the purchase price with debt.
The initial deal was announced on June 21. Then 21 days later the buyout price was raised by 9%, to $31.00 per share. 24 days later the company announced that the extraordinary general meeting of shareholders will be held after 30 days on September 4. The deal will close a few days after that. In terms of speed, this must be some kind of a record. I have never seen anyone so eager to throw down $1.78 billion cash. The buyout group rushed like a bank robber leaving a crime scene. And who could blame them? After all, this deal is a shareholders robbery happening in broad daylight.
Spreadtrum's future is very bright. It is at the start of a multi-year cycle in China and emerging markets of subscribers transitioning from 2.5G feature phones to smartphones. The company is also benefiting from the expansion of its smartphone portfolio. Spreadtrum has so many hidden treasures in its vault (including patents, intellectual properties, R&D centers), but let's assume for now those treasures are all worth zero. In its latest quarter, revenue grew 60.5% year-over-year. Non-GAAP net income grew 74.8% year-over-year to $0.95 per share. The strong demand for entry-level smartphones based on Spreadtrum's single-core smartphone chipsets starts to emerge and will gain momentum. It launched a dual-core TD smartphone solution in 2Q, and plans to launch a WCDMA smartphone in late 3Q or 4Q, a quad-core smartphone chip in 4Q, and a simple 5-mode LTE chip in 4Q. The company just signed lucrative mega contracts with Samsung (SSNLF.PK) and Huawei. Years of investments just start to pay off. Based on the current trend, I expect Spreadtrum to earn more than $4.50 per share in 2014 and maintain its rapid growth rate during this multi-year cycle. Applying a conservative 15x forward P/E, the company is worth $67.50 per share. Growing at over 60% per year, there is a lot of upside in the future.
Why did the management refuse to provide the next quarter guidance like they have done in the past? Because it will show a growth rate higher than 60% that will infuriate the shareholders - "look what a deal you gave away". And Tsinghua is rushing to close the deal, because amazing growth is showing, and the company's bright future in the prosperous cycle is surfacing.
Some of Spreadtrum's competitors are listed in China at more than 30x P/E multiples in spite of much lower growth rates. If Tsinghua immediately lists Spreadtrum in Shanghai or Hong Kong, it will likely more than double or triple its investment, right away.
Do shareholders have no rights? For years shareholders have paid for the expensive R&D and investments to build Spreadtrum's portfolio. Now as soon as it's time monetize the investments and the prosperous cycle comes in sight, Tsinghua comes and tries to take it away. Could it succeed?
I participated in the 3SBio (SSRX) buyout deal and the company had to adjourn the shareholder meeting at the last minute on April 25 and then raised the offer price from $15.40 to $16.70 because they couldn't get enough "Yes" votes. In the Dell (DELL) deal, Michael Dell famously stated his "best and final" offer price and then raised it hours before the scheduled shareholders vote, despite near-term business deterioration. As long as shareholders object strongly enough. These deals all benefit the buyers at the expense of shareholders, but they are nothing compared to the Spreadtrum deal, in which the low-ball $31.00 buyout offer price approaches absurdity, and the Spreadtrum shareholders need to object strongly enough.
I URGE fellow shareholders to vote "No" at the Spreadtrum extraordinary general meeting at any price lower than $34.50. That price is still too low in my opinion but I am not a major shareholder and I guess most shareholders are too eager to unburden themselves of the shares and be taken advantage of. Tsinghua raised their original offer price by 9% quickly and without any hesitation. If I were a major shareholder I would fight long and hard, and I think the buyout price should be raised to $40 or higher. I believe at $50 per share Tsinghua would still be more than happy to do the deal. I heard that one of the motives of the buyout is that there is a national mandate to protect the intellectual properties and strengthen communication securities. If the buyout deal fails, Tsinghua will suffer a reputational damage, in addition to political unfriendliness, and the Spreadtrum stock will be trading at $200 or much higher at the end of the multi-year cycle of emerging market subscribers transitioning from 2.5G feature phones to smartphones.