CIC Invests $300 Million in SMIC

APRIL 19, 2011 THE WALL STREET JOURNAL

By PRUDENCE HO And CHESTER YUNG
HONG KONG—China's largest contract chip maker by capacity Semiconductor Manufacturing International Corp. said the country's sovereign-wealth fund, China Investment Corp., agreed to invest $300 million in the firm by buying convertible preferred shares and warrants.

The investment from CIC comes after SMIC laid out an ambitious capital investment plan earlier this year. The company said in March it needs to spend around $12 billion to support its rapid growth over several years. An investment by CIC, which rarely buys into technology companies, shows that the sovereign-wealth fund supports the fast-growing contract chip market that is currently dominated by its Taiwan peers.

After struggling for years with losses, SMIC reported a net profit in the second, third and fourth quarters of last year. But the company still trails far behind rival contract chip makers Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. in terms of production technology and scale.

Jiang Shangzhou, chairman of SMIC, said the investment "provides a source of capital that allows us to take full advantage of our project pipeline. Partnering with CIC is conducive to realizing our development objectives and enhancing our competitive advantage in the international arena."
Under the agreement, CIC will invest $250 million in SMIC, acquiring 360.59 million convertible preferred shares at 5.39 Hong Kong dollars (69 U.S. cents) each. Each preferred share can be converted into 10 ordinary shares at a price of 53.9 Hong Kong cents. Based on this price, it would represent a discount of about 11.6% to SMIC's Monday closing price of 61 Hong Kong cents. SMIC shares were recently up 3.3% at 63 Hong Kong cents.

After the issuance and conversion of the new shares, CIC will own around 11.6% of SMIC's outstanding share capital. The agreement also provides CIC with warrants for investing an additional US$50 million in SMIC, and entitles CIC to nominate one member of SMIC's board of directors.
SMIC said it will use the net proceeds for capital expenditure and debt repayment.

SMIC reported a net profit of US$68.6 million in the fourth quarter of 2010, compared with a net loss of US$617.7 million a year earlier. Its debt level at the end of December stood at US$884.1 million.
Bank of America Merrill Lynch is the sole financial adviser to SMIC on the deal, according to the statement.

Write to Prudence Ho at prudence.ho@dowjones.com and Chester Yung at chester.yung@dowjones.com