Hedge fund pressure unlikely to block Qualcomm bond

By Danielle Robinson

NEW YORK, April 17 (IFR) - Hedge fund pressure to break up Qualcomm is not likely to be an obstacle when the world's largest phone chip-maker comes to market as expected with a jumbo bond to finance a share buyback.

Activist hedge fund Jana Partners, which holds 4.4 million shares in Qualcomm, wants it to split its chip-making business from its technology-licensing operation, among other changes.

But with A1/A+ ratings, no debt outstanding and some US$32bn of cash on hand, Qualcomm is highly unlikely to take heed - and investors are expected to shrug off Jana's complaints as well.

"Qualcomm is a US$113bn company," said Matt Duch, senior portfolio manager at Calvert Investments.

"So I'm sure the (buy-side) response is: they are too big for Jana to really influence management decisions."

Jana is widely seen as the biggest and toughest of all hedge fund activists, and typically its involvement would spell nothing but trouble for a company.

Moreover, its gripes about Qualcomm's recent performance are understandable.

Qualcomm shares have slumped almost 9% year-to-date, and the company is facing intense competition from the likes of Samsung, MediaTek and Intel.

"We believe that the board and management recognise the need to address its historical underperformance and improve investor perceptions of the company," Jana said this week, calling Qualcomm's chip business "essentially worthless" at current valuations.

But with its strong ratings and lack of debt, Qualcomm has the ability to issue tens of billions of dollars of bonds for shareholder-friendly actions - and still remain single A rated with cash to spare.

"As a bondholder you're always concerned that a company may pursue more aggressive financial policies to boost shareholder returns," said Scott Kimball, portfolio manager at Taplin, Canida & Habacht.

"But an inaugural issuance in the A rated technology bucket by a company with no debt outstanding would appeal to a wide audience."

With demand for high-quality corporates increasing with every drop in government bond yields worldwide, investors are more willing to accept bonds that mitigate risks with covenants.

"In this market, Qualcomm could structure the bond issuance with strong covenants (change of control language, limitations on leverage and subordination) and enough credit spread to overcome the Jana Partners overhang," said Kimball.

"In fact, one could argue that debt with heavy covenants limits Jana's flexibility."

PRESSURE'S ON

Jana is hardly alone when it comes to activism, which has skyrocketed in the US since the credit crisis.

With large piles of offshore cash, tech companies like Qualcomm and Apple - which bowed to pressure with its first-ever bond for a share buyback two years ago - are regular targets.

According to Moody's, tech companies were the target of 20% of all such activism in 2014.

And the ratings agency said there had been 55 cases across 14 non-financial industry sectors by early April, versus 43 in the same period in 2014.

Qualcomm would be one of the last of the tech giants to bite the bullet and put debt on its balance sheet to pay for shareholder-friendly actions, and the market is gearing up for a bond deal as large as US$10bn.

While there is no official mandate yet, expectations are that deal will surface soon after the company announces earnings on April 22.

A bond would help finance a US$15bn share buyback plan announced by the company in March, about two-thirds of which it aims to do this year.

Some analysts say Qualcomm could easily issue up to US$20bn and still keep a low single A rating.

And the investment-grade bond market has proven time and again that it can absorb mammoth deals in one fell swoop - even for lower rated issuers like Actavis, which sold US$21bn across 10 tranches in March. Actavis is rated Baa3/BBB-/BBB-.

"While we originally thought management would take leverage up to 1.0x, indicating a US$10bn issuance, we think that with activist pressure, Qualcomm may end up with closer to US$20bn of debt over time," said Erin Lyons, technology analyst at CreditSights.

"At this level, Qualcomm could hold onto a low single A rating, given it would still have a sizeable net cash position."

(Reporting by Danielle Robinson; Editing by Natalie Harrison and Marc Carnegie)