China-backed Canyon Bridge agrees UK semiconductor deal

Imagination said in a filing that its board had agreed to a deal that values the company at approximately GBP550 million ($742 million). CBFI Investment, which is indirectly owned by Canyon Bridge, will pay GBP1.82 per share – a 41.6% premium to the September 22 closing price – through a scheme of arrangement.

The transaction was triggered by Apple saying that it would no longer use Imagination’s technology in its graphics processor units from 2018 or early 2019. Apple is a longstanding customer and accounted for 45.2% of Imagination’s revenue in the 2017 financial year.

Following a strategic review, Imagination announced in May that it would divest MIPS and Ensigma, its microprocessor and connectivity divisions. This generated inbound inquiries about the entire company and a formal sale process was initiated in June. MIPS will be acquired by US-based Tallwood Venture Capital, which specializes in semiconductor-related investments, for $65 million. This is expected to lessen regulatory scrutiny in the US.

Imagination was founded in 1985 as VideoLogic and listed on the London Stock Exchange in 1994. The name change, which came in 1999, coincided with a change in strategy to focus on intellectual property licensing rather than manufacturing. Its revenues come in the form of licensing and royalty payments from customers that use Imagination technology in their products.

The company’s core IP involves graphics, video and vision processing for semiconductors. In addition to MIPS and Ensigma, the PowerVR brand covers graphics and multimedia operations. Imagination claims that more than 10 billion units containing its technology – including mobile phones and other handheld devices, home electronics, and networking products – have been shipped since inception.

Imagination recorded group level revenue of GBP151.9 million for the 2017 financial year, up from GBP141.4 million in 2016. PowerVR contributed GBP94.8 million, with MIPS and Ensigma generating GBP35.3 million and GBP7.6 million, respectively. Adjusted operating profit – which excludes non-recurring items – was GBP20.3 million compared to a loss of GBP24.5 million in 2016. The consolidated net loss narrowed to GBP27.9 million in 2017 from GBP80.8 million the previous year.

Canyon Bridge, founded by Benjamin Chow and Raymond Bingham, is headquartered in Silicon Valley and has operations in Beijing. Chow has previously held senior roles in China Reform Fund Management - a PE firm sponsored by China Reform Holdings and other central state-owned enterprises - Beijing Leading Capital, SIG China and Warburg Pincus.

The firm seeks to make control investments in technology companies and support expansion in growth markets. In this respect, it is like many Chinese investors targeting semiconductor assets in the US and elsewhere. Tsinghua Unigroup has been the most active player, but is now focusing more on developing domestic semiconductor capacity.

Last November, chipmaker Lattice said it had agreed to be sold to Canyon Bridge in a deal worth $1.3 billion. The Committee on Foreign Investment in the US (CFIUS) put the deal through three 75-day review cycles, during which Lattice and Canyon Bridge proposed mitigation terms intended to address national security concerns.

The parties were unable to reach a consensus on mitigation – normally the point at which the prospective buyer abandons the transaction. However, in this instance, it was referred to President Donald Trump, who exercised his veto right. It is only the fourth time a US president has blocked a deal under the CFIUS statute.

The Imagination acquisition requires shareholder and regulatory approval. Under certain circumstances, if Canyon Bridge fails to obtain regulatory approval, it must pay GBP13.7 million to Imagination in compensation.

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• Canyon Bridge Capital Partners