SNDK: License Payments Drive the Samsung Offer
The pain finally ended for Sandisk (SNDK-NASDAQ) shareholders, and although Eli Harari is rebuffing the initial offer, he is likely to capitulate sooner or later. Yes, Eli, it is time to part with your baby.
ThinkPanmure’s research note today dissects the economics of their licensing/royalty model, which drove the logic of the offer, and might provide relief to the likes of Micron Technology (MU-NYSE) who has suffered from overcapacity issues in the NAND industry:
Samsung last night announced a cash offer of $26/share for SNDK. We are raising our price target on SNDK shares to $30. While SNDK has already rebutted the offer from Samsung, we believe the trade-off is between Samsung not renewing the offer in August 2009 and going into prolonged litigations, which we believe SNDK cannot afford given the state of the NAND industry, and SanDisk agreeing to the offer, which takes into account reasonable assumptions for the license revenues in perpetuity. We believe we could see a counter offer from Toshiba, but the conditions for Toshiba appear extenuating.
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Tough year for the home team...Sandisk One Year Chart
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KEY POINTS:
Let’s look at the dynamics of the deal. Samsung with this acquisition essentially forgoes the $300-400M/yr license payment and also gets approximately $100M licensing revenues from Hynix, also access to the MLC, x3, x4 technologies, and SNDK retail distribution outlets worldwide.
For SNDK: SanDisk gets about $350M/year from Samsung, potentially dropping to $150M/year from 2010, and about $100M/year from Hynix. Assuming $500M/year in royalties for 2009, $300M/year for 2010-2014, and $200M thereafter, very generous assumptions on royalties, we calculate the value of the royalty stream in perpetuity at $22.75/share. SNDK has about $2.4B in cash on hand offset by about $6.3B in debt lease commitments. We believe the attraction for Samsung is the royalty stream that it offsets in perpetuity, owning the entire NAND IP, the attraction of getting Hynix as a royalty customer, and, for Samsung, lowering its overall NAND production costs and not having to pay royalties to SNDK.
For Toshiba: It is a major loss position and, hence, we believe the company could make a counter offer, but the odds are against Toshiba. Toshiba stands to lose if Samsung makes the acquisition as 1) the balance of power shifts to Korea, 2) Samsung now will own most of the NAND IP if the acquisition goes through, 3) it will reduce the royalties that Samsung pays Toshiba, 4) Toshiba will have to fund its NAND CapEx by itself, and 5) the loss of its patent position makes NAND more costly for Toshiba. But, we believe the bigger problem is that Toshiba is a $15B market cap company competing with Samsung, a $75B market cap company, to acquire SNDK. Even worse, is the fact that Toshiba has a net debt of 1.3Trillion Yen (approximately $12B), which makes it financially extenuating for Toshiba to compete with Samsung’s outright cash offer for SNDK. While Toshiba has control provisions and the deal has to pass regulatory muster, we believe Toshiba, financially, is not as strong.
For Micron: We believe this potential consolidation in the NAND space could take out a lot of NAND supply, reducing pricing pressure, improving gross margins for MU, and potentially diverting new usiness as the market looks for a second source. We rate Micron Buy with an $11 price target, which is based on a 1.15x Price to Book that we believe is reflective of the overall sentiment in the DRAM space. MU shares have traded from a low of 0.55x to a high of 1.99x book over the last five calendar years.
We are raising our price target on SNDK to $30, as we believe SNDK is trying to negotiate a larger price tag. We could see Toshiba make a counter offer, which could continue to keep premiums high. We maintain our Accumulate rating.
SNDK shares are trading at $23 in pre-market trading.
Company Update:
- Toshiba had total cash on hand of 295B Yen ($2.75B) compared to Samsung already making an all-cash offer for SNDK of $5.85B.
The reasons we believe such a deal, though possible, will probably not happen right away are: 1) Samsung has time on its side. It is much-better capitalized and profitable in its memory business compared to SNDK, which is at negative operating margins and already in violation of debt covenants.
2) Samsung royalty payments, though $400M per year today, could drop off substantially to a $150M per-year run-rate as its royalty agreements expire in August 2009.
3) There are multiple Fab J.V.s between Toshiba-SNDK, and they share SLC/MLC NAND IP, which is core to x3 also, with mutual SNDK-Toshiba agreements that preclude immediate outright Fab/IP purchase by other entities.
4) There is about $6.3B of off-balance-sheet lease debt obligations, which have to be addressed.
5) SNDK has lost the lead in the NAND process technology node.
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position
FT Transcript of MER/BAC Deal
FT’s Alphaville has the complete transcript up of the original conference call today...not a lot of questions answered however....
Can you quantify the marks that you are taking out of the Merrill balance sheet in order to render your tier 1 capital projection?
Not at this time, we’re not prepared. All of our marks are preliminary and obviously given the public information and those marks, we’re not– we do not want to create a situation where it causes pre-release of Merrill Lynch’s numbers.
Thanks. Can you talk about pro-forma tangible capital ratio at BAC for this deal?
Let me get back to you only because I don’t have the stuff in front of me. I was– we were focused on tier 1. Obviously, though the, the capital stack that Merrill Lynch had made progress within recapitalizing has a significant component of common compared to some other institutions and so that will be– that will obviously contribute to this being an all-stock deal helps also.
Keep in mind Merrill’s stake in Blackrock (BLK-NYSE)...it dramatically impacts the math here given it is worth north of $11 billion. What will ultimately happen? I would bet there were some change of control provisions with the investment, perhaps we will hear more on this later.
Highlights from that Bank of Amerrilla Conference Call
FT Alphaville
Sum of the Parts Ain’ t What It Used to Be
On Wall Street it is always another day, another dollar...but this week's action is leaving market players verklempt.
Apparently Dick Fuld did not learn anything from Jimmy Cayne, and is pulling defeat from the jaws of survival. What a stubborn SOB:
...since June, Lehman’s (LEH-NYSE) embattled chief executive officer Dick Fuld has been refusing various deals that could have saved his firm, arguing that the price on offer was too low. FT
There is at least one winner here, as NY Fed head Timothy Geithner gets a seat at the table and further burnishes his resume. Perhaps he has a playdate with John Thain next week....as the vultures move on to Merrill Lynch (MER-NYSE). But Citigroup is arguing Merrill's various division's are worth far in excess of the current stock quote...will John Thain prove to be another deer in the headlights?
Lazard Insiders to Peel Out of Stock
Lazard Ltd’s (LAZ-NYSE) stock has been about as good as it gets on the SellSide, assuming you can pigeonhole their business model as such. The stock has been trying to bust a move, but Friday’s erratic price action, in which markup artists seemingly ran into a smackdown, embedded a clue.
Will they bid’em back up after the deal is put to bed?
Lazard Ltd.’s current and former employees, including Vice Chairman Steven Golub and North America Chief Executive Officer Kenneth Jacobs, plan to sell as much as $334 million of stock in the New York investment bank more than three years after it went public.
The executives will sell 6.44 million shares to the public in an offering managed by Goldman Sachs Group Inc. and Lazard Capital Markets, according to a U.S. Securities and Exchange Commission filing today. At the Aug. 29 closing price of $42.39, that stock is worth $273 million..... The stock offering would cut the percentage owned by insiders to less than 38 percent, the filing said. Wasserstein, the company’s largest individual shareholder, isn’t selling shares in the offering, according to the filing. Bloomberg
You have to give the insiders props for their timing, having patiently waited out the storm that has engulfed the broker/dealers. After Goldman prices the deal we will find out if the stock can trade into the 50’s...by the end of the year.
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Wacky trading on Friday...this deal is easily digestible, however.
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Lazard Executives Will Sell as Much as $334 Million of Stock
Bloomberg
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The content contained in this blog represents the opinions of underthecounter. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position
