Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Diodes Incorporated (DIOD) ended the trading year of 2012 on a strong note. Last week, the manufacturer of high-quality application specific standard products for semiconductor markets announced the acquisition of BCD Semiconductor Manufacturing (BCDS).

The Deal

Diodes announced that it has agreed to acquire BCD Semiconductor Manufacturing in an all-cash transaction valuing the firm at $151 million.

Diodes offers $8.00 per share for the ADR shares of BCD. The net deal value comes down to roughly $112 million, based on the company's net cash position of $38.9 million. Shares of BCD almost doubled in a response to the deal, now trading at $7.56 per share. At this level, shares are still trading some 5.5% below the offer price.

The deal is an attempt to boost the manufacturer's presence in Asia, notably in China. By acquiring BCD, Diodes aims to achieve significant sales leverage, as well as establish a significant manufacturing base in the region.

CEO Keh-Shew Lu commented on the deal, "This proposed acquisition underscores Diodes' strategy to expand our market and growth opportunities through select strategic acquisitions. This transaction will greatly enhance our analog product portfolio by expanding our standard linear and power management offerings, including AC/DC and DC/DC solutions for power adapters and chargers, as well as other electronics products."

Diodes notes that BCD Semiconductors reported $137 million in trailing revenues over the past twelve months. The company reported a net profit of $6.5 million for the period. Based on the fact that Diodes is willing to pay $112 million for the operating assets of the firm, this values the firm at 0.8 times annual revenues and roughly 17 times earnings.

Diodes anticipates that the deal is immediately accretive to its GAAP earnings per share.

The deal has been approved by the boards of both companies. The deal is still subject to approval by shareholders of BCD. Other closing conditions include the normal regulatory approval. The deal is expected to close in the first or second quarter of 2013.

Valuation

Diodes ended its third quarter with $168.3 million in cash and equivalents. The company operates with $51.0 million in short and long term debt, for a net cash position of $117.3 million. As such, Diodes has sufficient financial flexibility to acquire BCD.

For the first nine months of 2012, Diodes generated revenues of $470.5 million. The company reported a net profit of $20.1 million attributable to its shareholders for the period. Based on the company's fourth quarter outlook, Diodes is on track to generate annual revenues of roughly $635 million, on which it could earn around $25 million.

The market currently values Diodes at $798 million, which values operating assets around $680 million. This values Diodes at roughly 1.1 times annual revenues and roughly 27-28 times annual earnings.

Diodes does not pay a dividend at the moment.

Some Historical Perspective

Year to date, shares of Diodes have lost some 20% of their value. Shares gradually rose from $22 at the start of the year, reaching highs of $27 in February. Some cautious guidance updates send shares to lows of $13 in November, before bouncing back to current levels around $17 per share.

Shares of Diodes are still trading roughly 50% below all time highs set around the $35 mark back in 2007 and 2011. Between 2008 and 2012, Diodes roughly boosted its annual revenues by some 50%. The company's profitability has been volatile, but positive.

Investment Thesis

Investors in Diodes are applauding the deal with BCD, despite the generous premium offered for the shares. Shares of Diodes spiked up 5% just after the release of the announcement, but fell back slightly from that point in time.

Diodes will boost its annual revenues by some 20% to a level over $750 million per annum as a result of the deal. The acquisition multiples seem favorable as well. Deal multiples are some 30% below Diodes own valuation, based on revenue and earnings multiples. On top of that, Diodes should be able to generate both cost and revenue synergies.

The deal which Diodes made has been applauded by its shareholders, based on the fair deal multiples. Additionally, prospects for revenue and costs synergies should boost the valuation. The price tag has a limited impact on the financial position of Diodes.

While I think the deal is a net positive, I remain on the sidelines. I do not think that the current valuation is appealing enough at roughly 1.2 times annual revenues and roughly 25 times earnings on a pro-forma basis. While I applaud the strong financial position of the firm, Diodes is not using its financial resources to repurchase shares at attractive levels, or pay dividends.

I see few reasons to pick up shares at these levels, despite the excellent deal.

Source: Investors Applaud Diodes' Acquisition Of BCD Semiconductor