Deal focus: Korean GPs seal semiconductor carve-out

The deal

MagnaChip Semiconductor, a South Korean chipmaker, agreed in late March to sell its foundry services group to a special purpose entity managed by two local private equity firms, Alchemist Capital Partners Korea and Credian Partners, for $435 million. Alchemist and Credian are joint general partners of the project fund, while SK Hynix and the Korean Federation of Community Credit Cooperatives (KFCC) are the LPs. KFCC’s interest in the fund will be 50% plus one share.

SK Hynix will contribute $174 million for 49.8% and take no active role in the management of the asset, a SK Hynix spokesperson said. The remainder of the LP interest is contributed by the GPs, according to sources familiar with the situation.

The deal is expected to close in the third quarter of 2020. There are no regulatory obstacles because the sale is to financial sponsors. The impact of the coronavirus outbreak on chip production is said to have been minimal and demand has not been affected. 

The players

Alchemist first looked at the asset in conjunction with SK Hynix, with Credian subsequently bringing in KFCC at a later stage, the sources said. SK Hynix’s interest in MagnaChip stems from a strategic objective to develop its non-memory chip business in response to a decline in the memory segment. SK Hynix was previously reported to have submitted a preliminary bid for the foundry services group in the first half of 2019, alongside an unspecified Chinese strategic investor.

Participating in the deal as an LP means SK Hynix can hedge the investment risk and take time monitoring the market before deciding whether to proceed with an outright acquisition, an industry executive said. 

The company has previously partnered with financial sponsors on deals. SK Hynix was part of a Bain Capital-led consortium that acquired Toshiba Memory in 2018, committing capital as an LP in a partnership structure. This approach helps SK Hynix work around a regulatory requirement that, as a sub-subsidiary of holding company SK Holdings, it must own 100% of any subsidiaries.

Alchemist and Credian are relatively new firms and the MagnaChip deal represents their largest to date. They have each made a few smaller commitments to other companies in the technology sector.

Alchemist was founded in 2017 and invested in HISEM, a semiconductor testing equipment manufacturer, later the same year. It has raised three project funds to date – a KRW70 billion ($57 million) vehicle in 2017 and KRW328 billion across two vehicles in 2018, according to the Financial Supervisory Service.

Credian was established in 2014 and has completed four deals, ranging in size from KRW13 billion to KRW76 billion, local media reported in March. They include Iruja, a domestic manufacturer of materials used in flat screen displays, biotech company Green Cross Biotherapeutics, and Wise UX global, a premium foods producer. It raised a KRW135.2 billion fund in 2016 and a KRW234.1 billion fund the following year. The latter vehicle is run jointly with Korean Investment Partners.

KFCC, which manages KRW70-75 trillion in assets, participated in the deal as part of efforts to increase its exposure to alternative investments, a KFCC spokesperson said. The firm set up an alternative investment department in March 2019 and it had a 20% allocation to the asset class last year. KFCC focuses solely on project fund investments within the private equity space.

Project funds typically have a lifespan of four years, far shorter than the standard 10 years for traditional blind pool private equity funds.

The asset

MagnaChip was established in 2004 through a private equity-backed spin-out of Hynix Semiconductor’s non-memory chip unit. It specializes in analog and mixed-signal semiconductor solutions. The company has two business lines: the standard products group manufactures OLEDs for use in flat panel displays and integrated circuits for power management; and the foundry services group produces integrated circuits for fabless and integrated device manufacturers.

MagnaChip posted sales of $750.9 million in 2018 and $792.2 million in 2019. The foundry services group contributed 43.3% and 38.8% in sales, respectively. However, gross profit from foundry services over the same period fell from $82.6 million to $64 million. This was attributed to an unfavorable product mix and a drop in the utilization rate in the first half of 2019 due to softening of global market conditions.

The foundry services group comprises the larger of MagnaChip’s two fabrication facilities. It is based in Cheongju and has a monthly production capacity of 82,000 eight-inch wafers – making it the eighth-largest facility of its kind globally. The land is leased from SK Hynix and MagnaChip has a supply agreement with SK Hynix covering services such as electricity, water, and bulk gases.

Approximately 1,500 employees will be transferred as part of the deal. This means the project fund will assume around $90 million in statutory severance liabilities.

The industry

Demand for eight-inch wafers has undergone a resurgence in recent years with the development of technology on internet-of-things applications and wearable devices. At the same time, the high barriers to entry mean that supply is relatively fixed.

“[The foundry services group] still requires large capital expenditure for capacity expansion to compete with global rivals,” an industry banker noted.

It is unusual for financial investors to run businesses of this nature because the sector requires a high level of strategic expertise. SK Hynix could therefore seek direct ownership of the asset when the financial investors exit, the banker added.

With operating cashflow expected to remain strong, the new owners will work to improve operating efficiency and reduce costs, one source familiar with the situation said. The goal is to return the business to profitability and allow capacity for investment. Professional executives will be appointed to manage the new entity while private equity firms will comprise the board of directors.

SK Hynix already has an eight-inch foundry in South Korea – known as SK Hynix System IC. DB HiTek is a midcap peer in this segment, while Samsung Electronics, the country’s largest chipmaker, also has in-house eight-inch wafer production capacity.

As for foreign peers, TSMC, United Microelectronics Corp, PSMC, GlobalFoundries, and SMIC were the world’s five largest contract chipmakers in 2019, according to an IC Insights report published in February. The first three are based in Taiwan, while GlobalFoundries is a US company and SMIC is based in China. They had a combined monthly capacity of 4.8 million eight-inch equivalent wafers, representing about 24% of the global total.

Alchemist and Credian did not return requests for comment by time of publication.

This is a first in a series of deal focus stories produced by AVCJ and sister title Mergermarket. To give feedback or make suggestions for future deal focuses, please contact Tim Burroughs (AVCJ) tim.burroughs@acuris.com or Kate Kim (Mergermarket) yukyeong.kim@acuris.com  

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• Topics
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• Buyouts
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• semiconductor
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