Arm’s IPO expectations tempered by reality as roadshow kicks off
A DOSE of reality is tempering the outlook for Arm’s public listing as the chip designer kicks off its roadshow this week, lowering expectations of both the valuation and the amount to be raised.
The SoftBank Group Corp-owned chip unit now seeks to raise US$5 billion to US$7 billion, down from as much as US$10 billion it previously sought, Bloomberg News reported. The valuation could also end up in the range of US$50 billion to US$60 billion, instead of a previous target range of US$60 billion to US$70 billion.
Arm has lined up some of its biggest customers – Apple, Nvidia, Intel and Samsung Electronics – as strategic investors for the initial public offering (IPO). But the stock debut will depend on how investors more broadly weigh factors including China risks, slowing smartphone market growth and any earnings upside from growing adoption of artificial intelligence.
“We expect US$50 billion to US$60 billion is the more realistic target,” Astris Advisory analyst Kirk Boodry wrote in a note on Friday. “The prospectus reveal was also less supportive as Arm reported revenue erosion and higher exposure to China than many expected.”
Arm runs most of its China business through independent unit Arm China, which is its single largest customer and accounted for almost a quarter of sales in the year ended March, according to the prospectus. The paperwork also confirmed that Arm’s revenue fell about 1 per cent to US$2.68 billion in the last fiscal year.
The latest projected valuation would be at least a setback for SoftBank founder Masayoshi Son. The Japanese company bought a 25 per cent interest in Arm from the Vision Fund for US$16.1 billion, valuing the chip designer at about US$64 billion. That stake would be worth US$12.5 billion to US$15 billion at Boodry’s projected range.
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Such “intra-company transactions add little value to price discovery while the prospectus clearly states that pricing was determined by pre-existing contractual conditions”, Boodry said. “Without knowing what those are, understanding the pricing is impossible.”
The numbers could still change as the roadshow proceeds this week, ahead of a formal listing on the Nasdaq next week. But a weaker-than-expected debut may negatively impact SoftBank’s credit outlook, according to Bloomberg Intelligence analyst Sharon Chen.
Raising US$5 billion to US$7 billion might not be enough to offset the impact of SoftBank’s purchase of the Vision Fund’s 25 per cent stake in Arm, Chen wrote in a note. The deal could weaken the Japanese firm’s adjusted loan-to-value ratio to about 24 per cent from 21 per cent in June, while its leverage might stay weak relative to Moody’s requirement for a Ba3 rating, she said.
A listing at a lower value “might also raise questions” around the implied US$64 billion valuation of the transaction between SoftBank and the Vision Fund, she added. BLOOMBERG
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