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UMC shares soar on capital plan

Shares of United Microelectronics Corp (UMC, 聯電) rose yesterday, almost hitting a two-month high, after the world's second-biggest contract chipmaker said it planned to reduce capital by 30 percent to boost return on equity (ROE).

UMC denied speculation, however, that the move would pave the way for a buy-out deal from overseas private equity fund investors.

"We have not approached any private equity fund [for a buyout deal]," company spokesman Chitung Liu (劉啟東) told reporters at a press briefing yesterday.

On Tuesday night, the Hsinchu-based chipmaker said in a filing to the Taiwan Stock Exchange that its board approved a proposal to pay back NT$57.4 billion (US$1.75 billion), or NT$3 per share, to its shareholders by canceling 5.74 billion in outstanding shares, or 30 percent of its overall 19.13 billion issued equity.

Investors welcomed the capital reduction proposal and raised UMC shares 6.89 percent to NT$20.95 in Taipei yesterday. That was compared to an increase of 1.06 percent on the benchmark TAIEX.

The company's American Depositary Receipts (ADR) had earlier surged 11 percent to US$3.67 in New York on Tuesday.

According to stock exchange regulations in Taiwan, UMC shares will be suspended for 15 days around August or September as part of the capital-reduction process, while its ADRs will be suspended in New York around the same time for a shorter period.

The capital reduction plan is expected to obtain the go-ahead during an extraordinary shareholders' meeting scheduled for June 11. UMC's capital reduction is the biggest of its kind in Taiwan over the past six months.

"UMC hopes to boost the return on equity for shareholders by improving its capital structure," the chipmaker said in the statement.

UMC stressed that the capital reduction would not affect its future capacity expansion plans. Instead, the chipmaker said, the company would generate sufficient cash flow from its operations to fund a new 12-inch wafer fabrication plant in Tainan, as well as for developing advanced technologies.

UMC has NT$83 billion in cash and the equivalent as of the third quarter of last year. The company said earlier that it planned to spend US$5 billion in building the plant over the next few years.

"The capital reduction will definitely have a positive impact on UMC, which has reflected on its stock price," said Rick Hsu (徐稦成), a semiconductor analyst with Nomura Securities Co in Taipei.

Hsu might join other investment research houses such as Merrill Lynch and raise his investment rating on UMC from "neutral."

``This announcement should support the stock despite probable negative guidance that we expect from the company,'' Merrill Lynch analyst Dan Heyler wrote in a report yesterday.

Heyler upgraded the shares to ``buy'' from ``sell'' with a 12-month price target of NT$25.

The company's overcapitalized balance sheet is nothing new, "however the action is coming sooner than the market anticipated," Heyler wrote.

Eric Chen (陳慧明), an analyst with BNP Paribas Securities, raised his projection for UMC's return on equity by 20 percent to 10.9 percent this year in the wake of the 30 percent cut in capital.

The share price of UMC is also expected to rise to NT$23.7 due to the capital reduction plan, which would represent about a 13 percent upside from yesterday's closing price.

Chen was cautious about upgrading UMC's investment rating, however. He said he still favored rivals Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), MediaTek Inc (聯發科) and Holtek Semiconductor Inc (盛群半導體) because of better fundamentals.

additional reporting by Bloomberg
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