How Cheap Is STATS ChipPac?

Rosesyrup Research

How Cheap Is STATS ChipPac?

Target price: $1.64 + (Possible Control Premium)

Upside: 124%

Call: Buy for Risk Arbritage Only !

I received 7 requests to value this firm, STATS ChipPac, which has a business in packaging processor chips. The company has recently received 2 potential takeover offers from two Chinese firms, though one of them has already dropped out from the negotiation (read the news here). As a result of the potential M&A, the company share price has nearly doubled after the news was released. 

Valuation

The purpose of this write up is to value STATS ChipPac and estimate the potential price the Chinese acquirer is likely to pay in the event of an agreement is reached on the M&A.

Model: FCFF

Assume growth of 8% till 2016 and 3.9% therefore. Growth rates are forecast by Chips industry experts.

Justification

The result of my calculation is pretty reasonable and conservative  due to the following reason: 

1. The growth rate of 8% and 3.9% are really estimate for the European and US market. According to the experts, Asia firm will do much better and STATS ChipPac's business is largely located in Asia. Thus the growth rates I used are conservative.
2. Temasek Holding paid $1.75 for STATS ChipPac in 2007. This is pretty much close to our target price of $1.64. It was higher than our target price probably due to control premium Temasek paid for owning majority (83%) share in the company.
3. Like Temasek, the China Acquirer would need to pay a control premium above $1.64 in order to acquire huge amount of STATS ChipPac share from Temasek.
4. China Huatian, one of the potential acquirer dropped out of the bid citing "acquisition conditions were not favourable" as the reason (read the news article here). Being "not favourable" probably mean that the acquisition price quoted to Huatian is much higher than what the share is currently trading now. This is in line with our target price which show that STATS ChipPac is really worth 124% than currently price.

Recommendation 

1. Risk Arbritage strategy: Buy the counter now in expectation that  Jiangsu Changjiang Electronics Technology Co will ultimately accept Temasek Holding's offer and buy STATS ChipPac.
2. If the negotiation fails and no longer any party is interested in STATS ChipPac, sell the stock and cut losses. 
3. Do not hold for long term, because the industry STATS ChipPac is in is highly competitive and often more favourable to new entrant than incumbents. You can read more about the industry dynamics from Motley Fool Article here.
4. For me personally, I will only put in small amount of capital (10k or less) and I am prepared to cut once the talk fails.