Israel-based Tower Semiconductor Ltd. (TSEM), also known by the brand name "TowerJazz," a leading pure-play independent specialty Integrated Circuit foundry, announced early this morning that it has signed a non-binding term sheet contemplating its purchase of Micron Technology’s (MU) fabrication facility in Nishiwaki City, Hyogo, Japan.
The proposed purchase nearly doubles their current internal manufacturing capacity, cost-effectively increasing production by 60,000 wafers per month, and it also positions TowerJazz to achieve its expressed $1 billion annual revenue run rate by 2014. The purchase is valued at approximately $140 million, including $40 million in cash, approximately 20 million of TSEM ordinary shares and the remainder approximately $70 million in assumed long-term retirement liabilities.
Currently TowerJazz has two manufacturing facilities in Israel, one in the U.S. and additional capacity available in China through manufacturing partnerships. Most of its revenue at 69% is from North America, with Asia at 22% accounting for the 2nd highest share. Japan currently accounts for only 0.5% of its revenue base. With the proposed purchase, TowerJazz would have half of its manufacturing capacity located in Japan, and thereby help it better target customers in Japan, South Korea and the rest of the Asia-Pacific region.
Per Reuters, TSEM management has indicated that the purchase will help TowerJazz target Japanese high-end camera companies, a market they have not been able to make progress in so far. Also, as part of the proposed acquisition, the companies anticipate that they will sign a supply agreement for TowerJazz to manufacture products for Micron in the Japan facility for approximately three years, which will help TowerJazz ease the transition to building its own customer base. Also, TSEM foundries currently manufacture integrated circuits with geometries ranging from 1.0 to 0.13-micron; the acquired Micron facility in Japan is capable of supporting geometrics down to 95nm which is 0.095-micron.
While the press release does not mention the impact of the deal on TSEM earnings, the Reuters press release quotes TowerJazz CEO Ellwanger as saying, "In 2013, as we build up our customer base, it will become a very big cash producer and contribute strongly to profit." While Micron does not break down the operational numbers in its 10-K by manufacturing facility, overall Micron had a 19% operating margin in the most recent fiscal year ended August 2010. By contrast, TSEM had operating margin of 8.5% in the most recent fiscal year ended December 2010. Also, the purchase doubles TSEM revenues going forward while adding only 20 million shares to their current 255 million shares; it does not add any long-term debt and the approximately $70 million in long-term retirement liabilities would be payable incrementally upon retirement benefits.
TSEM closed last Friday at $1.35 and is trading pre-market today in the $1.40s. It generated $129 million or 55c per share in net profit on a non-GAAP basis for fiscal year 2010, excluding $119 million in depreciation and amortization expenses. The Micron manufacturing facility purchase should be accretive to earnings in the intermediate- to long-term keeping in mind Micron’s generally high operating margins at its manufacturing plants versus TSEM, the fact that it doubles revenues while diluting share count by only an additional 8% and that it gives them greater capability to serve Japan, South Korea and Asia-Pacific customers due to proximity of the purchased plant to that region compared to its current plants in North America and Israel.
The company projects that the purchase will be completed by June 2011.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using I-Metrix by Edgar Online.
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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TSEM over the next 72 hours.