(Bloomberg) — A dose of reality dampens the outlook for Arm Ltd’s IPO. with the chip designer kicking off its roadshow this week, lowering expectations on both the valuation and the amount to be raised.
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The chip unit, owned by SoftBank Group Corp., is now trying to raise $5 billion to $7 billion, compared to $10 billion it previously aimed for, Bloomberg News reported. The valuation could also be in the range of $50 billion to $60 billion, instead of a previous target of $60 billion to $70 billion.
Arm has some of its largest customers – Apple Inc., Nvidia Corp., Intel Corp. and Samsung Electronics Co. – Lined up as strategic investors for the IPO. But the stock debut will depend on how investors more broadly weigh factors including China’s risks, the slowing growth of the smartphone market and any gains in earnings from the rising adoption of artificial intelligence.
“We expect $50 billion — $60 billion is the more realistic target,” Astris Advisory analyst Kirk Boodry wrote in a note Friday. “The prospectus disclosure was also less supportive as Arm reported revenue erosion and greater exposure to China than many expected.”
Arm conducts most of its China business through its independent arm China unit, its largest customer and accounting for nearly a quarter of sales in the year ended March, according to the prospectus. The paperwork also confirmed that Arm’s sales fell about 1% to $2.68 billion over the past fiscal year.
Read more: Arm needed 3,500 words to explain China’s pre-IPO risks
At the very least, the latest expected valuation would be a setback for SoftBank founder Masayoshi Son. The Japanese company bought a 25% stake 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 within Boodry’s expected range.
Such “intra-company transactions add little value to the pricing, while the prospectus clearly states that the price was determined by pre-existing contractual terms,” said Boodry. “Without knowing what they are, it’s impossible to understand the prices.”
The numbers could change as the roadshow progresses this week ahead of a formal listing on the Nasdaq next week. But a weaker-than-expected debut could negatively impact SoftBank’s credit outlook, according to Bloomberg Intelligence analyst Sharon Chen.
Raising $5 billion to $7 billion may not be enough to offset the impact of SoftBank’s purchase of the Vision Fund’s 25% stake in Arm, Chen wrote in a note. The deal could weaken the Japanese company’s adjusted loan-to-value ratio from 21% in June to about 24%, while leverage could remain weak compared to Moody’s requirement for a Ba3 rating, she said.
A lower-value listing “may 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
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