By Aron Adamski, BSc Economics @LSE
OVERVIEW OF THE DEAL:
- Announcement date: 08/02/2021
- Industry: Semiconductors
- Implied EV/LTM EBITDA: 20.86x
- Deal consideration: All-cash
- Acquirer advisors: Nomura
- Target advisors: J.P. Morgan, Qatalyst Partners
Renesas Electronics, one of the world’s largest suppliers of automotive chips, entered into an agreement to acquire Dialog, maker of power management technology and wireless chips for smartphones, for €4.9 billion.
Under the terms, Renesas Electronics will pay €67.5 in cash for each Dialog share, a 27.3% premium to Dialog’s share price 5 days before the announcement.
Renesas intends to finance part of the consideration through debt financing, including a bridge facility from MUFG Bank and Mizuho Bank. It also plans to raise equity finance by issuing new shares. Depending on the timing or other conditions of the equity finance, it is possible that it may not raise debt and fund the acquisition by issuing equity.
The transaction is expected to be accretive to Renesas’ margin and EBITDA after closing.
The deal has been unanimously approved by the boards of directors of both companies is expected to close in the second half of 2021.
COMPANY DETAILS: Renesas Electronics Corporation
- Founded in: 2002
- Headquartered in: Tokyo, Japan
- Market Cap: €16.72bn
- EV: €20.53bn
- LTM EBITDA: €1.7bn
- EV/ LTM EBITDA: 12.08x
Renesas develops, manufactures, sells, and services semiconductors in Japan, North America, Europe, and Asia. The company offers microcontrollers and microprocessors, audio and video products, automotive products, data converters, interfaces and memory products. The company offers its solutions to the automotive and industrial markets. It has a collaboration with Altair to develop cellular IoT solutions and with Panthronics for wireless charging and connected IoT solutions.
COMPANY DETAILS: Dialog Semiconductors
- Founded in: 1998
- Headquartered in: Reading, United Kingdom
- Market Cap: €4.6bn
- EV: €4.28bn
- LTM EBITDA: €218.15mn
- EV/ LTM EBITDA: 19.6x
Dialog develops and distributes integrated circuits (ICs) for personal hand-held devices, LED lighting, and automotive applications worldwide. Among other products, it offers automotive infotainment systems, Bluetooth low energy ICs, low power Wi-Fi system on chips and voice over digital enhanced cordless telecommunications. The Anglo-German semiconductor specialist serves household names like Apple, Samsung, Xiaomi and Panasonic.
STRATEGIC RATIONALE:
EXPANSION OF MICROCHIPS PORTFOLIO
The deal will enable Renesas to expand its chip portfolio beyond cars as part of an acquisitive strategy which already cost the firm €8.31bn over the past 4 years. Renesas generates about half of its revenue from automotive semiconductors and has been investing aggressively to broaden its footprint beyond cars to areas such as data centres and consumer devices. For example, in 2019 Renesas bought IDT, a data centre semiconductors specialist, for €5.98bn. Diversification will likely strengthen the Group’s long-run financial position and shield it from fluctuations in demand in some sectors whilst stretching its balance sheet in the short-run.
“The transaction we announced today represents our next important step in catapulting Renesas’ growth plan to achieve substantial strategic and financial benefits, following our previous acquisitions.” ~ Hidetoshi Shibata, President and CEO of Renesas
“The deal may fit with the company’s broader strategic direction to expand its product portfolio, but for now the financing concerns are weighing heavily.” ~ Naoki Fujiwara, Shinkin Asset Management
COMPLEMENTARY NATURE
Both Groups will be able to leverage each others’ expertise due to the complementary nature of the deal. In particular, Renesas will benefit from Dialog’s design expertise. Dialog’s low-power technologies and connectivity expertise adds complementary product lines, strengthening Renesas’ global footprint across large, high-growth markets in the IoT, industrial and automotive fields.
Renesas hopes to achieve €166mn in revenue synergies per year, mainly through expanding its cross-selling opportunities given that semiconductor customers increasingly prefer to buy multiple components from the same vendor. Renesas’ revenues are also expected to rise as result of tapping into fast-growing industries alongside continued innovation of solution offerings. Revenue synergies are expected to realise in approximately 4/5 years after closing.
Cost synergies resulting from operational efficiencies are expected to be as high as €104mn per year, and realised in approximately 3 years after closing.
RISKS AND UNCERTAINTIES:
DIALOG’S DEPENDENCE ON APPLE
At the end of 2020 Apple made up 55% of Dialog’s revenues and 66% at the end of 2019. In 2018, Dialog’s share price was hit severely by concerns that Apple would develop its own chips for the iPhone and Apple ended up licensing some of some of Dialog’s technology, buying certain patents and poaching over 300 of its engineers in a €500mn deal. Dialog’s heavy reliance on its largest customer makes its future cash flows more risky as Apple can decide to start manufacturing microchips on its own at any time.
Nevertheless, Dialog is also trying to diversify its revenue streams. Last year, it acquired industrial IoT specialist Adesto for 500mn euros and by the end of 2023 share of revenues from Apple is expected to fall to 25%.
VALUATION:
The price looks reasonable when held up against comparable deals. The enterprise value applied to Dialog is 20.86x LTM EBITDA. This is a similar multiple to that paid in comparable transactions (see table above). The average EV/LTM EBITDA multiple for these three deals is 19.41x LTM EBITDA.
