Elpida Acquisition Will Be Accretive To Micron, Part III

Jun.18.13 | About: Micron Technology (MU)

With Micron's (NASDAQ:MU) quarterly release upon us and a June 27 court date to ratify the Elpida deal on the calendar, Wall Street analysts are finally including in their research reports estimates of what Elpida will do for Micron. Yesterday saw three upgrades from Jefferies, Credit Suisse and Citibank. My first article on Elpida parsed the accounting of a very old 8-K showing a pro forma consolidation. The second described the elimination of depreciation due to "push down accounting" resulting from purchasing Elpida so cheaply. Now we are finally seeing some validation of those ideas.

Credit Suisse wrote:

In addition, upon the closure of Elpida (expected mid/late summer) we see $1.00-$1.50 cents of accretion to our current CY14 estimate of $0.83, which itself has an upward bias due to better pricing.

And Citi chimed in with:

Quick Take. - With the Elpida deal nearing closure (bearing enhanced financial benefits due to yen devaluation) and memory prices likely to continue to rise, we remain positively biased to Micron shares, despite their 100% increase YTD. We estimate that Elpida will add $0.88 in incremental earnings to Micron-at 10x (a 32% discount to the current market multiple), this represents $8.80 in potential share price leverage or 147% of the ~$6.00 increase in MU shares since the deal was announced. Of course, since this time, DRAM prices have risen steadily, up 75% YTD. While Micron was still money losing as of F2Q13, we see potential for a swing toward profitability in their upcoming results. And given the significant leverage in their model, if we are right that memory prices remain stable or rise from here, we estimate a substantial improvement in core Micron earnings to $1.17 in FY14. Applying a similar 10x multiple to this figure and we derive a value for the core Micron of $11.70 + $8.80 for Elpida = $20.50 or 61% potential upside. Adding the value of Elpida to our core Micron price target of $13.50 results in $22.30 or 75% potential upside. We reiterate MU as our Top Pick in semiconductors. We increase our PT to $19, using our previous book-based valuation methodology; we recognize that should positive earnings become more stable, a shift to an earnings based methodology is conceivable.

Alas, the company has been loath to update us on Elpida results since Micron's reorganization plan has been contested at every step of the way. Finally, the last chance of appeals appears to be done. The June 27th 10am court date before Judge Sontchi in Delaware bankruptcy court has one main item on the agenda:

Motion of Foreign Representatives of Elpida Memory, Inc. for an Order Pursuant to 11U.S.C. §§ 1521, 1522, 1507 and 105(a): (I) Recognizing and Enforcing Japanese Reorganization Plan of Elpida Memory, Inc. and Japan Confirmation Order, (II) Entrusting Elpida Memory, Inc.'s U.S. Assets to Foreign Representatives and Approving Certain Plan Transactions, (III) Granting Permanent Injunction, and (IV) Granting Related Relief (the "Motion") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").

In other words, if this motion passes on the 27th then presumably the U.S. Chapter 15 process is done and it is up to Micron and the Japanese courts to implement the plan or reorganization.

Conclusion and Next Steps. I believe Elpida will prove even more accretive than the analyst reports quoted above. Elpida operates in the hot-as-a-pistol mobile DRAM space where there are increasing reports of parts already on allocation and against a backdrop of Apple (NASDAQ:AAPL) widely rumored to be releasing a new iPhone and a new iPad mini this year-- both voracious consumers of Elpida's (and Micron's) products. How much more accretive? I will hold back until an update in tomorrow's Micron earnings call or perhaps an 8-K like this old one updating the consolidation.

I sincerely hope that management will give us a detailed update on Elpida in tomorrow's call and can't imagine why they would not. It would be true to recent form if they waited until after the June 27 court date however.

Whether or not we get a financial update on Elpida I hope the sell-side analysts, who get to ask all the questions on these calls, will ask these two:

  1. In investor conferences, and in the US bankruptcy court proceedings, much has been made about applying Micron's test capabilities to Elpida's production. Has this begun? What level of savings could we expect once it is fully incorporated into Elpida's processes?
  2. What is the mechanism employed for Apple's purchase of mobile DRAM from Elpida? Is it cost plus? Market minus? Short, medium, or a long-term contract?

I'm sure SA readers are itching to ask other Elpida questions; please do in the comments below. Who knows? Maybe the sell-side will become interested in the things we'd like to know.

Disclosure: I am long MU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.