On July 26th, the office of TDK and NHK Spring were raided by the Japanese Fair Trade Commission for price collusion in the HDD suspension market which is Hutchinson Technology's primary business. Our sources indicate that Hutchinson Technologies (NASDAQ:HTCH) management was taken completely by surprise by this news, which is understandable. However, it is now highly unlikely that the U.S. Fair Trade Commission will allow this transaction to be approved. At a minimum, any transaction approval will be severely delayed and will likely go beyond November 1st of 2016 which allows TDK to walk away from the acquisition without a break-up fee or any repercussion.
So now we must look at Hutchinson on the fundamentals which have deteriorated since the TDK transaction was announced last November. Per statements from both Seagate (NASDAQ:STX) and Western Digital (NYSE:WDC), Hutchinson's two primary customers (accounting for 85%-90% of sales), the TAM (total addressable market) for HDD suspensions continue to shrink, which is the market that HTCH serves. Further, HTCH has been unable to diversify its revenue away from the suspension market. It appears any new product development or marketing was put on hold so HTCH could try to maintain a cash position that would allow it to maximize the price TDK paid.
Now the real concern. HTCH has $76 million of convertible debt due January of 2017. They also have $37.5 million due October of 2019 and $13.5 million of bank debt with PNC bank. Given that HTCH has not been profitable for year and has lost $22 million through the first 9 months of FY 2016, we see very few refinancing options for the company. Any equity raise to pay off this debt would basically have to totally recapitalize the company and would be close to wiping current equity holders out. Given the TDK situation, we don't see how other industry competitors can buy HTCH and given the negative cash flow, a financial buyer is out of the picture.
This situation is very sad and disappointing for Hutchinson Technology and its shareholders. HTCH was a small U.S. based company that found a way to survive and create some value with the TDK acquisition. Now they must operate in a difficult, shrinking market and find a way to pay back significant debt in a short period of time.
Disclosure: I am/we are short HTCH.
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.