Major Stealth Acquisition by Micron, Viewed Outside as a Win and a Loss

Micron Technology Inc. (NASDAQ: MU) has had a dismal 2015, and its 61% drop so far in 2015 made it the seventh worst-performing member of the S&P 500 Index. Micron has already seen its surge and sell-off following the Elpida acquisition. Now is Micron is making another acquisition by purchasing the remaining 67% of Inotera not already owned. The price tag is listed as roughly $4 billion, or $3.2 billion net of cash and debt.

This merger is contingent on regulatory approvals and is also subject to Micron being able to secure roughly $2.5 billion in new debt to fund its acquisition of Inotera.

Micron also will issue $1 billion of new equity to Nanya and will pay roughly $500 million from the company balance sheet. The purchase price implies more than a 40% market premium, but it is also about 50% below the peak value from July of 2014. Before thinking this is a done deal, Micron’s press release said that it can terminate the transaction if it is unable to secure the $2.5 billion of debt on satisfactory terms.

As far as how a $3.2 billion or $4 billion deal is weighted for Micron, its market cap is now just under $15 billion, since its shares are down so much from prior highs well above $30.00. To compare the deal to the $2.5 billion Elpida acquisition: Micron agreed to acquire Elpida’s equity for $750 million and to pay a total of $1.75 billion in interest free annual installment payments that were to end in 2019.
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As of the September 3, 2015, balance sheet, Micron listed long-term debt of $6.252 billion and $698 million in other liabilities. All-in total liabilities were listed as $11.792 billion, versus $24.143 billion in total assets. Micron also had some $7 billion in liquidity, when you tally up its cash, cash equivalents and short-term and long-term investments.

24/7 Wall St. has looked for outside analyst reports on this news. Not that many reports have been issued yet. One positive report was seen at Credit Suisse, and one negative report was seen from Bank of America Merrill Lynch.

Credit Suisse maintained its Outperform rating and has a price target of $25 on Micron. Its report said:

While the transaction appears reasonably valued, the EV/RV and Price/Sales of 0.73x and 2.6x is higher than past transactions, which have ranged from 0.26x to 0.46x on EV/RV and 0.5x to 1.0x on EV/Sales. Assuming higher end of historic range will imply that deal is priced ~$1.7bn – $1.9bn higher than past deals – however this could be partially offset by Nanya agreement, which could lead to $50 million to $150 million of annual revenues starting in 2017 and additional Nanya equity investments. Ongoing China investments within the industry do also make us wonder if there is a hidden element to the deal, and China could be involved in Debt or Equity financing of the deal. We view the acquisition as positive for Micron, though company could have waited for more opportunistic timing. … While still few years out, the agreement highlights the value of Micron’s intellectual property portfolio.

Merrill Lynch was far less favorable. The firm rates Micron as Underperform, and the price objective was cut by 12% to $11.00. Merrill Lynch’s report said:

Micron announced that it has entered into an agreement with Inotera to acquire the remaining interest (67% stake = 32% Nanya and its related companies and 35% public) in Inotera Memories of Taiwan (current market cap US $4 billion) by spending $4 billion. This deal (with Nanya) implies about 30% M&A premium (per share bid NT$30.0 vs today’s closing price NT$23.0). That said, Micron’s overall business model won’t be changed after full acquisition of Inotera (vs 33% stake currently) given all of Inotera’s products (DRAM chips; completely Micron’s tech/IP based) have already been purchased by Micron. Inotera’s November sales (only NT$3.4bn or about US$0.1bn) reveal a sharp decline YoY (down 51%) due to lower price/volume (PC downturn, 20nm yield issue). … Our PO of $11.00 is derived from trough-cycle fair value, which presents about 0.9x FY16-17E PBR. Our forecast still reveals mid- to high-single digits ROE but large loss can easily happen if there is a downturn coupled with competitors’ more aggressive chip price cut.

Micron’s press release indicates that it is buying 100% of Inotera’s DRAM output, representing approximately 35% of Micron’s total DRAM production. Inotera is expected to be fully deployed on Micron’s 20 nanometer technology by the middle of 2016. Inotera had net cash of approximately $0.9 billion U.S. dollars as of its latest fiscal quarter ending September 30, 2015. Micron also said that this deal is a culmination of a highly successful seven-year partnership with Inotera.
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While there is a very mixed cut from two different analysts on Tuesday, the strong market and the effort to grow earnings was making investors snap up Micron shares on Tuesday. Obviously some of the buying may be short sellers covering their shorts, and the last short interest date showed nearly 60 million shares counted in the short interest.

Micron shares were last seen up 4.3% at $14.25. Its consensus analyst price target is $20.82 and it has a 52-week trading range of $13.50 to $35.74.