MagnaChip Semiconductor IPO Priced to Work?

| About: MagnaChip Semiconductor (MX)
Korea-based designer and manufacturer of analog and mixed-signal semiconductor products, MagnaChip Semiconductor Corp. (NYSE:MX), priced its 9.5M share IPO at $14.00, $1 below the indicated range. The offering raised $133M, of which 90% was offered by selling shareholders, of which approximately 6.6M shares are offered by funds affiliated with majority shareholder Avenue Capital Group (whom will own about 52% of the outstanding common stock post offer). The offering is led by underwriters Barclays Capital (NYSE:BCS), Deutsche Bank (NYSE:DB), and Goldman (NYSE:GS).
MagnaChip has a 30-year operating history, and what it feels is one of the broadest and deepest analog and mixed signal semiconductor platforms in the industry. It operates three key segments: Foundry Services (52% of revenue), Display Solutions (38% of revenue), and Power Solutions (10% of revenue). It sold over 2,400 distinct products to over 500 customers in 2010.
The company is not without its share of risks. MX is coming off a Chapter 11 bankruptcy re-organization from 2009. It also has high levels of concentrations, with its top 10 customers representing 63% of 2010 revenue, and LG representing 16%. MX also operates in a highly cyclical and highly competitive semiconductor market.
The company has had a strong 2010, outpacing its competitors with 38% revenue growth. Its foundry business grew 55% in 2010, through the introduction of 31 new technologies and products shipped to four new customers. In display, the company continues to be the leading supplier to LG and has increased share with Samsung (OTC:SSNLF) (replacing NEC (OTC:NELTY) for the DDI business). In the power business, MX is gaining scale with a $74M run rate as of Q4’10, and 93 customers at the end of the year versus 25 at the end of ’09.
The offering price of $14.00 represents a $550M market cap and $625M enterprise value. For the year ended 2010, MX is priced at an 8.2x P/E and 3.95x EV/Adjusted EBITDA. The other foundry companies by comparison -- including Taiwan Semiconductor (NYSE:TSM), Semiconductor Manufacturing International (NYSE:SMI) and United Microelectronics (NYSE:UMC) -- are currently trading at a P/E of between 9.3x and 12x 2010, and an EV/EBITDA of 3.25x and 7.3x 2010. The foundry business only represents a little over half of MagnaChip’s revenue, and thus using these peers for valuation doesn’t really give the company credit for its other two segments of power and display, which arguably could demand higher multiples.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MX over the next 72 hours.

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