UPDATE 5-Zarlink expecting white-knight takeover offer

Thu Sep 1, 2011 5:19pm EDT

* Urges shareholders to reject Microsemi bid

* Says several companies started due diligence

* Zarlink shares up 3.62 percent at C$3.72 (Adds analyst comment, stock close)

By Trish Nixon and Pav Jordan

TORONTO, Sept 1 (Reuters) - Specialty chipmaker Zarlink Semiconductor ZL.TO said on Thursday it expects a white knight to best a hostile C$550 million ($561 million) takeover offer from U.S. rival Microsemi (MSCC.O), and is in talks with at least 15 potential buyers.

Zarlink said third parties were interested in buying either part or all of the Ottawa-based company, which designs computer chips for communications and medical applications.

"Based on the level of interest which has been expressed to date ... it is likely that a transaction will emerge from the board's strategic process which is superior to the Microsemi offers," Zarlink Chairman Adam Chowaniec said in a statement.

Zarlink did not identify the suitors, but analysts say its award-winning medical applications technology - it builds wireless chips for medical devices such as pacemakers and defibrillators - could attract such industry giants as Intel (INTC.O), Texas Instruments TXN.N and Qualcomm (QCOM.O), which are either entering or active in the sector.

California-based Microsemi has offered C$3.35 a share for Zarlink, but the shares have consistently traded higher than that since Microsemi first made its proposal public in July, suggesting the market thinks a higher bid is likely.

Zarlink said several parties have started due diligence and expressed interest in pursuing a transaction.

"Fifteen is a big number, and I've always thought, from day one since this thing was announced, that there was a high probability of at least one rival bid. I continue to hold to that view," said Brian Piccioni, an analyst with BMO Capital Markets.

Jeff Mo, a portfolio manager whose firm Mawer Investment Management holds a 2.4 percent stake in Zarlink, also expects a higher bid.

"In our sensitivity analysis we felt that Zarlink could be worth between C$3.50 and C$4.50 a share," he said.

MICROSEMI HOLDS

But Microsemi held to its cash offer price on Thursday, saying the Zarlink board had yet to reveal an alternative.

"There is nothing in Zarlink's circular that would lead us to conclude there is additional value in the company that was not understood by us, or the market, prior to our bid," the company said.

Zarlink stock closed up 2.79 percent at C$3.69 in Toronto on Thursday.

The shares have lagged their peers, but analysts say a turnaround in its financial performance in the past three to four years, and a significant build-up in its medical business, are promising growth, making Zarlink more attractive to strategic buyers.

"The Microsemi offers are highly opportunistic," Chowaniec said. "They come at an inflection point in Zarlink's financial, technological and operational repositioning."

Microsemi went hostile with a formal offer to shareholders on Aug. 17, following its public proposal in July and unofficial talks with Zarlink that started in January.

The U.S. company has been an aggressive buyer in recent years, acquiring nine companies since 2009. Its bid for Zarlink includes an offer to debentureholders of C$1,367.35 per C$1,000 principal amount of convertible debentures.

Zarlink said that all of its directors and officers intend to reject the bid, and urged shareholders to do so as well.

Telecom and cable companies use Zarlink's main communications products, including line circuits and network timing and synchronization products, to deliver bundled voice, video, data and mobile services.

Microsemi's bid expires at 5 p.m. EDT (2100 GMT) on Sept. 22 but can be extended or withdrawn.

($1=$0.98 Canadian) (Additional reporting by Alastair Sharp; editing by Peter Galloway and Rob Wilson)

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