Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/renesas-electronics-corp" target="_blank" data-smartkarma-citation="entities:15933:1" rel="noopener">Renesas Electronics (6723 JP)</a> on 8 February 2021 announced that they had signed an agreement to acquire <a href="https://www.smartkarma.com/entities/dialog-semiconductor-plc-664a1f83-2a21-4690-a91f-fb971832e7ad" target="_blank" data-smartkarma-citation="entities:21607:1" rel="noopener">Dialog Semiconductor (DLG GR)</a> for an equity value of €4.9bn. The company on the same day <a href="https://www.renesas.com/eu/en/about/press-room/notice-concerning-filing-shelf-registration-statement-issuance-new-shares" target="_blank" rel="noopener">announced</a> a shelf registration to issue up to ¥270bn of shares to pay for the deal.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/211/854/original/Screenshot+2021-06-08+at+10.38.41+AM.png?1623120032" class="editor-image img-responsive" data-smartkarma-image-id="211854"></figure></section>Renesas shares fell on the news, bounced, then fell, and have traded in a range of ¥1,100-1,300/share since then. In the interim (it will take until the end of 2021 to get the Dialog deal past foreign review boards and anti-trust regulators), the company experienced <a href="https://www.renesas.com/eu/en/node/1509341" target="_blank" rel="noopener">a fire at its Naka Factory</a> which will cost a ¥24bn impact in H1, there is an ongoing global chip shortage affecting both semiconductor makers and their customers, and the end of May saw the company finally <a href="https://www.renesas.com/eu/en/about/press-room/renesas-announces-issuance-new-shares-and-secondary-offering-shares" target="_blank" rel="noopener">announce</a> its equity offering - large at nearly US$4bn. This seemed like an overhang, but has ended up not being so much of one.The interim period, while showing a sideways trend for Renesas, saw its Peers outperform dramatically. The announcement of the equity offering and its size looked like it would present significant overhang. It has not turned out to be the case. There has been a "buy the news" reaction. It is a big offering. There are a bunch of moving parts. And lots of index flow.

Renesas Electronics (6723 JP) on 8 February 2021 announced that they had signed an agreement to acquire Dialog Semiconductor (DLG GR) for an equity value of €4.9bn. The company on the same day announced a shelf registration to issue up to ¥270bn of shares to pay for the deal.Renesas shares fell on the news, bounced, then fell, and have traded in a range of ¥1,100-1,300/share since then. In the interim (it will take until the end of 2021 to get the Dialog deal past foreign review boards and anti-trust regulators), the company experienced a fire at its Naka Factory which will cost a ¥24bn impact in H1, there is an ongoing global chip shortage affecting both semiconductor makers and their customers, and the end of May saw the company finally announce its equity offering - large at nearly US$4bn. This seemed like an overhang, but has ended up not being so much of one.The interim period, while showing a sideways trend for Renesas, saw its Peers outperform dramatically. The announcement of the equity offering and its size looked like it would present significant overhang. It has not turned out to be the case. There has been a "buy the news" reaction. It is a big offering. There are a bunch of moving parts. And lots of index flow.

Renesas Equity Offering - Priced To Go With Index Demand Now and Later

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Renesas Electronics / Equity Capital Markets

Renesas, along with INCJ, aims to raise around US$3.4bn via selling a mix of primary and secondary shares.The current deal would be of somewhat similar size as two of the past deals that we have covered for Renesas:<ul>
<li dir="ltr" aria-level="1">US$2.8bn bn in 2017 <a href="https://www.smartkarma.com/insights/renesas-electronics-placement-additional-thoughts-on-valuation-flotation-and-ownership" target="_blank" rel="noopener">Renesas Electronics Placement: Additional Thoughts on Valuation, Flotation, and Ownership</a></li>
<li dir="ltr" aria-level="1">US$2.4bn in 2018 <a href="https://www.smartkarma.com/insights/renesas-placement-tighter-effective-discount-and-placement-overhangs-but-statistic-supports-a-bid" target="_blank" rel="noopener">Renesas Placement: Tighter Effective Discount and Placement Overhangs but Statistic Supports a Bid</a></li>
</ul>In this insight, we'll run the deal through our ECM framework and talk about deal dynamics.

Renesas, along with INCJ, aims to raise around US$3.4bn via selling a mix of primary and secondary shares.The current deal would be of somewhat similar size as two of the past deals that we have covered for Renesas:
US$2.8bn bn in 2017 Renesas Electronics Placement: Additional Thoughts on Valuation, Flotation, and Ownership
US$2.4bn in 2018 Renesas Placement: Tighter Effective Discount and Placement Overhangs but Statistic Supports a Bid
In this insight, we'll run the deal through our ECM framework and talk about deal dynamics.

Renesas Placement - Very Well Flagged, past Deals Have Done Well but Large Size Warrants Correction

David Blennerhassett

Event-Driven

Last Week in Event SPACE:  Intouch, Toshiba, Orocobre/Galaxy, Tilt, Primewest/Centuria, Huarong

European Event-Driven Analyst

Jesus Rodriguez Aguilar

On 9 April, Dialog <a href="https://www.dialog-semiconductor.com/sites/default/files/2021-04/Results_of_Meeting_Announcement_09.04.21_vff.pdf" target="_blank" rel="noopener">announced</a> that, in connection with the cash offer to be effected by means of a scheme of arrangement:
<ul>
<li>At the Court meeting, a majority of scheme shareholders voted in favour of the resolution to approve the Scheme.</li>
<li>At the EGM, the special resolution to approve the scheme was also passed.</li>
</ul>
Completion remains subject to satisfaction or waiver of the other conditions (see <a href="https://www.dialog-semiconductor.com/sites/default/files/2021-03/03.%20Scheme%20Document.pdf" target="_blank" rel="noopener">scheme document</a>), mainly competition and regulatory approvals (Germany, the People's Republic of China, Taiwan and the United States).
Timeline. The acquisition is currently expected to become effective in H2 2021.
The acquisition of Dialog will boost Renesas competitive offering in low-power technology and connectivity across smart devices, cars (especially EVs) and IoT. Renesas is mainly exposed to Car (47.6% of FY 2020 revenues) and Industrial/Infrastructure IoT (50.8% of FY 2020 revenues), therefore Dialog would increase the sales mix in mobile (including Apple, which would amount to less than 10% proforma revenues). Exposure to China will be increased. Main drivers for growth will be smartphones and IoT.
I am assuming that the offer will complete at the current offer price as the multiple offered is fair (that said, Dialog seemed arguably a bit undervalued by the market given its exposure to Apple), and there should not be anti-trust of regulatory concerns given the size of Dialog.
The gross spread (19 April market close) is 4.6%, c. 9% annualised, which is relatively high in comparison with recent European friendly deals. Dialog has not paid any dividend in recent years and presumably will not pay a dividend this one either (source: Capital IQ consensus). The spread may reflect concern over Renesas's leverage, and/or anti-trust scrutiny, low risk in my view. Dialog's shares are liquid.
Recommendation is long DLG GR, TP €67.5.

On 9 April, Dialog announced that, in connection with the cash offer to be effected by means of a scheme of arrangement:

At the Court meeting, a majority of scheme shareholders voted in favour of the resolution to approve the Scheme.
At the EGM, the special resolution to approve the scheme was also passed.

Completion remains subject to satisfaction or waiver of the other conditions (see scheme document), mainly competition and regulatory approvals (Germany, the People's Republic of China, Taiwan and the United States).
Timeline. The acquisition is currently expected to become effective in H2 2021.
The acquisition of Dialog will boost Renesas competitive offering in low-power technology and connectivity across smart devices, cars (especially EVs) and IoT. Renesas is mainly exposed to Car (47.6% of FY 2020 revenues) and Industrial/Infrastructure IoT (50.8% of FY 2020 revenues), therefore Dialog would increase the sales mix in mobile (including Apple, which would amount to less than 10% proforma revenues). Exposure to China will be increased. Main drivers for growth will be smartphones and IoT.
I am assuming that the offer will complete at the current offer price as the multiple offered is fair (that said, Dialog seemed arguably a bit undervalued by the market given its exposure to Apple), and there should not be anti-trust of regulatory concerns given the size of Dialog.
The gross spread (19 April market close) is 4.6%, c. 9% annualised, which is relatively high in comparison with recent European friendly deals. Dialog has not paid any dividend in recent years and presumably will not pay a dividend this one either (source: Capital IQ consensus). The spread may reflect concern over Renesas's leverage, and/or anti-trust scrutiny, low risk in my view. Dialog's shares are liquid.
Recommendation is long DLG GR, TP €67.5.

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Renesas reported solid 4Q numbers with revenue coming in at ¥191.6bn and EBITDA at ¥57.5bn, in line with consensus at ¥191.1bn and ¥58.7bn respectively. It was 1Q guidance which was the real story, however, as the projection is for ¥197-205bn in revenue and an OPM of 22% at the midpoint.

Renesas reported solid 4Q numbers with revenue coming in at ¥191.6bn and EBITDA at ¥57.5bn, in line with consensus at ¥191.1bn and ¥58.7bn respectively. It was 1Q guidance which was the real story, however, as the projection is for ¥197-205bn in revenue and an OPM of 22% at the midpoint.

United Kingdom

Dialog Semiconductor plc was an Anglo-German semiconductor system designer and manufacturer, specializing in highly integrated mixed-signal integrated circuits (ICs) for low-power applications. Their products included battery management systems, Bluetooth low energy and Wi-Fi connectivity solutions, and power conversion ICs for smartphones, IoT devices, automotive systems, and industrial markets. The company was founded in 1985 and was headquartered in Reading, United Kingdom, before being acquired by Renesas Electronics in 2021.

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Dialog Semiconductor (DLG GY)

Renesas Equity Offering - Priced To Go With Index Demand Now and Later

Renesas will offer up to 373mm shares or what should be ~$4bn of new and used stock. Pricing (with pushing and shoving before) should be 9 June....

Travis Lundy

Renesas Placement - Very Well Flagged, past Deals Have Done Well but Large Size Warrants Correction

Renesas, along with INCJ, aims to raise around US$3.4bn via selling a mix of primary and secondary shares. The current deal would be of somewhat...

Sumeet Singh

Last Week in Event SPACE: Intouch, Toshiba, Orocobre/Galaxy, Tilt, Primewest/Centuria, Huarong

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

Renesas/Dialog: Update and Spread

Gross spread (19 April) is 4.6%, about 9% annual spread considering less than six months to close, relatively high in comparison with recent...

Jesus Rodriguez Aguilar

Renesas – Not Just About the Auto Side

Renesas Electronics posted strong 4Q numbers and punchy 1Q guidance setting the stage for a very strong 2021 as automotive, white goods and factory...

Mio Kato

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