By Aron Adamski, BSc Economics @LSE
OVERVIEW OF THE DEAL:
- Announcement date: 20/10/2020
- Industry: Semiconductors
- Deal attitude: Friendly
- Financing: Cash reserves+ loans
- Acquirer advisors: Citibank Korea Inc.
- Target advisors: BofA Securities
South Korean chipmaker SK Hynix agreed to purchase part of Intel’s memory business. Under the terms of the transaction, SK Hynix will acquire Intel’s NAND memory and storage business over the next five years. NAND chips are used to store data in smartphones and data centre servers. As part of the transaction SK Hynix will also acquire associated component and wafer units as well as the NAND manufacturing facility in Dalian, China.
The deal requires regulatory approvals. Once SK Hynix receives necessary approvals, it will acquire the NAND-associated IP and employees, together with the factory in China, with the first payment of $7 bn. SK Hynix will then acquire from Intel the remaining assets, including IP related to the manufacture and design of NAND flash wafers, R&D employees, upon a final closing with the remaining payment of $2 bn.
Intel will continue to manufacture NAND wafers at the Dalian Memory Manufacturing Facility and retain all IP related to the manufacture and design of NAND flash wafers until the final closing.
Transaction is subject to regulatory approval expected in late 2021. The deal is expected to close in March 2025.
OVERVIEW OF INTEL CORPORATION:
- Founded in: 1986
- Headquartered in: Santa Clara, California
- Market Cap: £191.73 bn
- EV: £201.03 bn
- LTM EBITDA: £30.26 bn
- EV/ LTM EBITDA: 6.64x
Intel Corporation designs, manufactures, and sells essential technologies for the cloud, smart, and connected devices worldwide. It is the world’s largest and highest-valued semiconductor chip manufacturer on the basis of revenue and is the developer of the x86 series of microprocessors, the processors found in most PCs. Intel supplies microprocessors for computer system manufacturers such as Apple, Lenovo, HP, and Dell. Intel also manufactures motherboard chipsets, network interface controllers and integrated circuits, flash memory, graphics chips, embedded processors and other devices related to communications and computing.
OVERVIEW OF SK HYNIX:
- Founded in: 1983
- Headquartered in: Icheon, South Korea
- Market Cap: £39.47 bn
- EV: £45.3 bn
- LTM EBITDA: £8.36 bn
- EV/ LTM EBITDA: 5.42x
SK Hynix together with its subsidiaries, manufactures, distributes, and sells semiconductor products worldwide. The company offers memory semiconductor products, including DRAM and NAND. It also provides computing, consumer, graphics, and mobile memory products. Hynix is the world’s second-largest memory chipmaker (after Samsung)and the world’s 3rd-largest semiconductor company. Hynix memory is used by Apple in some of their iMac, MacBook and MacBook Pro computers. Other products that use Hynix memory include DVD players, cellular phones, set-top boxes, personal digital assistants, networking equipment, and hard disk drives.
STRATEGIC RATIONALE:
NON-CORE DISPOSAL
From Intel’s perspective the transaction’s main goal is to divest its non-core businesses and move away from the volatile NAND chip industry and focus on its remaining Optane memory business. NAND supply chains have been severely disrupted by COVID across all levels of manufacturing and reemergence of a second wave could cripple the supply chain and negatively impact the entire industry again. Analysts also reported that U.S.-China tensions may have influenced Intel’s decision to sell its NAND flash memory factory in China.
Pressures in the NAND segment worsened Intel’s company-wide profit margins in 2019. At the same time, which Optane memory business, which is smaller, remained more lucrative as it taps more advanced technology. Instead of adding more random access memory (RAM) to your computer (which accelerates your system by enabling the processor to execute more tasks at once), you can enhance performance with an Optane.
“This transaction will allow us to further prioritise our investments in differentiated technology where we can play a bigger role in the success of our customers and deliver attractive returns to our stockholders” ~ Bob Swan, Intel CEO
The recent divestiture is one of a few of Intel’s steps taken to refocus the firm on its core competencies in fewer markets. It follows Intel’s sale of smartphone modem business for $1 bn to Apple last year. Intel said it would invest the transaction proceeds in areas such as 5G networking and AI.
SK HYNIX’S MARKET SHARE
NAND is the second largest commodity integrated circuit product by market size valued at $50 bn, trailing only behind DRAM. The NAND market is expected to grow with an estimated a 14.94% CAGR in the next few years.Compared to DRAM, the NAND market is more competitive as it comprises of many manufacturers. Samsung is the leader in the NAND flash market with a 31.4% share, followed by Kioxia with 17.2%, SK Hynix with 11.7%, and Intel and Micron MU.O with 11.5% each. Hence, by acquiring Intel’s NAND business, SK will boost its market share to 23.2%, making it the second largest producer in this rapidly growing segment.
The market for NAND chips grew in the past few months thanks to increased demand for PCs and servers as the COVID-19 pandemic forced millions of people to work from home, according to Trendforce. At the same time, it is an increasingly competitive industry characterised by price wars. According to Trendforce, over the past year, the average NAND sales price has decreased by 46%. Through increased market share SK could leverage significant economies of scale, enabling them to increase their margins and drive profitability up.
“Although the competitive environment surrounding us is not easy, we have made a bold decision to pave the way for our leap toward securing a firm position in the NAND business as in DRAM” ~Lee Seok-hee, SK Hynix President and CEO
RISKS AND UNCERTAINTIES:
SK Hynix shares jumped immediately after the news before valuation concerns saw them fall 2%, Samsung Electronics gained 1%.
“Shareholders are negative about the deal because they believe the price is too expensive.”~ Lee Seung-woo, Analyst at Eugene Investment & Securities
