Terms call for Menlo Park, Calif.-based Silver Lake to purchase a $200 million zero coupon convertible junior subordinated note maturing in 2008 and convertible at $10.50 per share. Flextronics has the option of calling the note, payable in cash or stock, after three years, but Silver Lake lacks a put option prior to maturity.
Jim Davidson, a founder of Silver Lake, said the firm initiated the deal with Singapore-based Flextronics.
"In the last 12 years, Flextronics has outperformed its peers in both attractive and difficult markets," he said. "We think Flextronics has one of the best franchise management teams in the electronics manufacturing sector."
Davidson, who will take a seat on Flextronics' board, said several Silver Lake partners have personally invested in electronics manufacturing companies for 12 to 15 years, and the consensus at the firm is the sector offers promising returns.
Neither Flextronics nor Silver Lake used outside advisers on the deal.
Although Flextronics has struggled in recent quarters, it has fared better than competitors such as Celestica Inc. of Toronto and Solectron Corp. of Milpitas, Calif., and its share price remains undervalued, analysts said.
Flextronics reported a net loss of $6.5 million for its fiscal third quarter on revenues of $3.9 billion, a 15% top-line increase from the prior quarter. It reported $614 million. By contrast, in its most recent fiscal quarter Celestica lost $435 million on revenue of $1.9 billion.
"Flextronics is a great company and Silver Lake wanted in," said Alexander M. Blanton, senior director with New York investment adviser Ingalls & Snyder LLC, which owns shares in Flextronics.
Blanton noted that Flextronics is the only large electronics manufacturer to have maintained flat to modestly growing revenues throughout the technology downturn. Although Flextronics' margins have deteriorated, sales of rivals such as Solectron and Sanmina-SCI Corp. of San Jose, Calif., have plunged as corporate customers slashed orders.
Still, Flextronics has not escaped the high-tech downturn unscathed. In addition to dips in revenue, the company has laid off employees and shuttered facilities, including printed circuit board manufacturing sites in California and Sweden that it was unable to sell.
Flextronics shares were up 1.6% in afternoon trading Monday to $8.82. The company traded at $35 to $40 per share in the early months of 2001, just after the collapse of telecom stocks.
Flextronics did not return a call seeking comment.
The deal with Silver Lake gives Flextronics extra cash to acquire inventory and facilities, which contract manufacturers purchase in fulfilling orders, as well as additional customers, said James Savage, a partner with Thomas Weisel Partners LLC of San Francisco.
"Silver Lake's got a lot of contacts among hardware makers, and this relationship will smooth some matters over for both companies."
Silver Lake's investment in Flextronics is its first in the contract electronics manufacturing sector. Formed in 1999, the firm's most notable deal was its November 2000 leveraged buyout of Seagate Technologies Inc. for $2.05 billion, the biggest technology LBO ever. Silver Lake took the maker of hard disk drives private in November 2000 before backing the company's IPO about a year later.
Seagate, based in the Cayman Islands, now has a market capitalization of about $4 billion.
Among Silver Lake's portfolio companies are Ameritrade Holding Corp. of Omaha; Enterasys Networks Inc. of Rochester, N.H.; and Riverstone Networks Inc. of Santa Clara, Calif.
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