Flextronics Announces Acquisition Of Solectron

In a clear sign there is over-capacity in the contract manufacturing sector, Flextronix (FLEX) Monday morning announced that it will buy rival Solectron (SLR) for about $3.6 billion in cash and stock.

Each Solectron share will be converted into the right to receive either 0.3450 shares of Flextronics or a cash payment of $3.89 per share, subject to the limitation that not more than 70% and no less than 50% of Solectron shares will be converted into FLEX shares.

The combined company will have more than $30 billion in annual revenue and about 200,000 employees in 35 countries.

To fund the cash portion of the deal, FLEX is borrowing $2.5 billion from Citigroup in the form of a seven-year senior unsecured term loan.

After the deal, Solectron holders will own 20%-26% of the combined company.

Flextronics says that some synergies could be realized within 12 months, but that it could take 18-24 months to fully integrate the acquisition, generating an estimated $200 million in after-tax synergies. The company said the deal once fully integrated should be at least 15% accretive to earnings.

Monday morning, Flextronics shares were down 34 cents at $11.36; Solectron was up 51 cents at $3.88.

Meanwhile, rival Jabil Circuit (JBL) was down 31 cents to $22.30; there may be some concerns on the Street about how the company will be affected by the combining of two of its key competitors.

FLEX vs. JBL vs. SLR 1-yr chart: