A dose of reality is tempering the outlook for Arm Ltd.’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.
(Bloomberg) — A dose of reality is tempering the outlook for Arm Ltd.’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 $5 billion to $7 billion, down from as much as $10 billion it previously sought, Bloomberg News reported. The valuation could also end up in the range of $50 billion to $60 billion, instead of a previous target range of $60 billion to $70 billion.
Arm has lined up some of its biggest customers — Apple Inc., Nvidia Corp., Intel Corp. and Samsung Electronics Co. — as strategic investors for the initial public offering. 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.
The valuation is a “slightly more palatable range versus what was initially spoken about,” said Jamie Mills O’Brien, an investment director at Edinburgh-headquartered Abrdn Plc, citing top-end numbers that had previously been discussed at as high as $80 billion. While it has “diversified its growth exposures and remains a very high-quality business model,” the company’s exposure to China carries risks, he said.
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% to $2.68 billion in the last fiscal year.
Read more: Arm Needed 3,500 Words to Explain Its China Risks Before IPO
“We expect $50 billion – $60 billion is the more realistic target,” Astris Advisory analyst Kirk Boodry wrote in a note Friday. “The prospectus reveal was also less supportive as Arm reported revenue erosion and higher exposure to China than many expected.”
The latest projected valuation would be a setback for SoftBank founder Masayoshi Son. The Japanese company bought a 25% interest in Arm from the Vision Fund for $16.1 billion, valuing the chip designer at about $64 billion. That stake would be worth $12.5 billion to $15 billion at Boodry’s projected range.
Such “intra-company transactions add little value to price discovery whilst 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 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 $5 billion to $7 billion might not be enough to offset the impact of the Vision Fund’s acquisition of a 25% stake in Arm, Chen wrote in a note. The deal could weaken the Japanese firm’s adjusted loan-to-value ratio to about 24% from 21% 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 $64 billion valuation of the transaction between SoftBank and the Vision Fund, she said.
Read more: All About Arm and Why It’s The Biggest IPO of 2023: QuickTake
–With assistance from Julia Fioretti.
(Updates with fund manager quote in fourth paragraph)
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