Merrill: United Microelectronics An 'Unappealing Buyout Candidate'

Back when Morgan Stanley got excited about the Freescale (FSL) buyout, we threw some cold water on the idea, saying “If you figure the average buyout will be at 9x EBITDA and you expect a 25% buyout premium to make speculating worth your while, you should only buy stocks trading below 7.2x EBITDA. Even then you should only buy the ones that might make the takeout boys salivate.”
It seems that line of thought is catching on.

Shares of United Microelectronics (UMC), the Taiwanese contract chip maker better known as UMC, have appreciated recently on speculation that the company could be a potential buyout target. But Merrill Lynch’s Daniel Heyler this morning warns that those hopes are likely to fade - and that the stock is likely to retreat.

Heyler says the company does not look very appealing as a buyout candidate, anyway. “Applying our takeover screen, UMC ranks 19 out of 27 Asian-based companies,” he says. “UMC scores low in terms of net cash to market cap and FCF (free cash flow) margin. At 7.1x EV/EBITDA, valuation is higher than all of the top-ten ranked companies.”

Of course, with the money flying around in private equity-land these days, who knows? It sure wouldn’t hurt the industry to catch a little bit of private-market discipline.

UMC 1-yr chart: