Western Digital, Misunderstood Merger With Significant Upside And Limited Downside
Alex Zhao, CFA • 40 Comments
Alex Zhao, CFA • 40 Comments
The Street's Upcoming Affair With SanDisk
Oct. 27, 2015, 5:35 PM
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Oct. 21, 2015, 9:32 AM
- Along with announcing a $19B deal to acquire SanDisk (SNDK +4.1%), Western Digital (WDC -2%) says it expects to report FQ1 revenue of $3.4B and EPS of $1.56 vs. a consensus of $3.28B and $1.56. Gross margin fell 90 bps Q/Q to 28.9%. With Seagate (STX -0.5%) having warned last week, the revenue outlook appears to confirm analyst suspicions Western gained enterprise hard drive share.
- Of Western's proposed $86.50/share payout to SanDisk, $85.10/share is in cash. The cash portion of the $86.50/share payout drops to $67.50/share if a planned investment in Western by Tsinghua Unigroup subsidiary Unisplendour (for a 15% stake) hasn't closed or is terminated.
- To help finance the deal, Western plans to obtain a whopping $18.4B worth of new debt facilities. It expects to continue paying its dividend, but will suspend its buyback program.
- Cost synergies are expected to reach a $500M/year run rate within 18 months; the deal is expected to be accretive to EPS within 12 months of closing (not surprising given it's mostly in cash). SanDisk's NAND flash manufacturing JV with Toshiba will be maintained.
- By acquiring SanDisk's NAND chip, controller, and SSD IP, and by gaining the ability to source NAND at cost, Western effectively neutralizes the cannibalization threat posed by SSDs/flash storage to its hard drive ops. For now, Seagate continues to rely on 3rd-party flash manufacturers; an alliance with Micron was formed in February.
- SanDisk is trading roughly 10% below Western's offer price.
Oct. 21, 2015, 8:00 AM
- SanDisk (NASDAQ:SNDK) +5.2% premarket after agreeing to be acquired by Western Digital (NASDAQ:WDC) in a cash and stock deal valued at ~$19B, confirming earlier speculation.
- The $86.50/share offer represents a 15% premium to yesterday's closing price for SNDK.
- WDC says the acquisition will double its market and expand its participation in higher-growth segments, and enable it to vertically integrate into NAND; CEO Steve Milligan will continue to serve as CEO of the combined company.
- WDC -3.1% premarket.
- Earlier: SanDisk beats by $0.29, beats on revenue
Oct. 21, 2015, 7:42 AM
- SanDisk (NASDAQ:SNDK): Q3 EPS of $1.09 beats by $0.29.
- Revenue of $1.45B (-17.1% Y/Y) beats by $50M.
- Shares +5.76% PM.
Oct. 20, 2015, 5:35 PM| Oct. 20, 2015, 5:35 PM | 7 Comments
Oct. 20, 2015, 9:15 AM
Oct. 19, 2015, 5:39 PM
Oct. 19, 2015, 4:42 PM
- Six days after reporting SanDisk (NASDAQ:SNDK) has talked with Micron (NASDAQ:MU) and Western Digital (NASDAQ:WDC) about a potential sale, Bloomberg reports SanDisk is in advanced sale talks with Western.
- Negotiations are said to have "accelerated" over the weekend. A deal could be reached as soon as this week.
- Western has been viewed by analysts as a smoother fit than Micron, given it's not currently a NAND flash manufacturer - with many thinking Western needs to become one to insure itself against hard drive cannibalization by SSDs - and SanDisk and Micron respectively having NAND alliances with Toshiba and Intel.
- SNDK +8.3% after hours. WDC -3.1%. MU -1.3%. Micron joined SanDisk in rallying last week following Bloomberg's original report, fueled by expectations a deal would improve Micron's NAND scale and IP, and potentially lead to more favorable industry pricing.
- Earlier today: SanDisk gains following Korean site's M&A report
Oct. 19, 2015, 9:56 AM
- BusinessKorea reports Samsung has concluded a full-blown acquisition of SanDisk (NASDAQ:SNDK) isn't in its interests, but adds the Korean tech/electronics giant is "keeping a close eye on the unfolding situation." It also states China's Tsinghua Unigroup has shown an interest in buying SanDisk along with previously-reported Micron and Western Digital.
- Samsung dropped a $5.85B bid to acquire SanDisk in 2008. Making a fresh bid would likely draw intense antitrust scrutiny, given Samsung is the NAND flash market's largest player and could see its share near 50% if it bought SanDisk. Likewise, U.S. regulators could object to SanDisk being acquired by a Chinese firm such as Tsinghua; there was recently a quick political backlash to reports Tsinghua had bid for Micron.
- SanDisk is adding to the big gains seen last week after Bloomberg reported talks have been held with Micron and Western. Q3 results arrive on Wednesday afternoon.
Oct. 19, 2015, 9:18 AM
- More than three years after Western Digital (NASDAQ:WDC) closed its acquisition of Hitachi's hard drive unit (HGST), China's Ministry of Commerce has approved integrating the business with Western Digital proper.
- The company will continue selling products under both the HGST and Western Digital brands, and maintain separate sales teams for two years. However, it plans to start integrating "corporate and other key functions, including [R&D], heads and media operations, engineering and manufacturing."
- HGST president Mike Cordano has been appointed to the newly-created position of COO. Western president Jim Murphy will now run the company's storage devices unit.
- Western is up 3.6% premarket. Archrival Seagate (NASDAQ:STX), hit hard last week by an FQ1 warning that some analysts argued indicates enterprise share loss to Western, is down 1.2%.
- Update (10:39AM ET): Western has given back its early gains. Seagate is down 2%.
Oct. 15, 2015, 7:08 PM
- "Based on the Pre-announcement and implied 117.5M [total addressable market], we believe Seagate (NASDAQ:STX) lost share on the Enterprise side of the business to Western Digital (NASDAQ:WDC)," writes RBC's Amit Daryanani after taking in Seagate's FQ1 warning, which was blamed on weak nearline enterprise hard drive sales. "ASPs declined materially where Enterprise units (40% gross margins) are in the $100+/unit range while PC/gaming units are in the $55-$65/unit range."
- Likewise, Brean's Ananda Baruah thinks both slightly higher-than-expected industry shipments and Seagate's enterprise issues "suggest a net-positive impact" for Western through at least calendar Q4. However, he argues Seagate's issues are temporary. "We maintain conviction that STX’s normalized EPS remains at least $5.00 (a key level for us). Bottom line is that STX has issued a significant response to the softer PC environment by reducing its Opex $s 20% from the Mar ’15 Q and Mar Q ’16 ... Our $65 [target] (30% appreciation) is 12x our estimated FY17 EPS of $5.30 and 13x our CY16 EPS of $5.00."
- Seagate fell 13.3% in regular trading to new two-year lows. Western fell 2.5%.
Oct. 15, 2015, 9:17 AM
- Seagate (NASDAQ:STX) now expects to report FQ1 revenue of $2.9B vs. prior guidance of $2.9B-$3.1B and a $3.03B consensus. Unit shipments are expected to total 47M - up from FQ4's 45.3M but down from 59.5M a year ago - with Seagate maintaining a 40% share (implies a total market of 117.5M).
- Gross margin (non-GAAP) is now expected to be at 24%, below prior guidance of 27% and down from 27.2% in FQ4 and 28.1% a year ago. Seagate blames lower-than-expected demand for 4TB and 6TB nearline hard drives. An 8TB product was recently announced.
- FQ1 op. cash flow is expected to total $800M. 20M shares were repurchased.
- CEO Steve Luczo: "While Seagate had strong operating cash flows and made significant progress in cost containment in the September quarter, we are disappointed we did not execute a product portfolio that fully addressed the demand in the nearline market. Looking ahead, we are confident that our nearline product portfolio will be fully competitive by our fiscal third quarter."
- Full FQ1 results arrive on the morning of Oct. 30. Western Digital (NASDAQ:WDC), recently rumored to have held buyout talks with SanDisk, is following Seagate lower. Seagate also issued an FQ4 warning in July.
Oct. 14, 2015, 12:46 PM
Oct. 14, 2015, 9:13 AM
Oct. 13, 2015, 5:38 PM
Oct. 13, 2015, 5:07 PM
- Sources tell Bloomberg SanDisk (NASDAQ:SNDK) is in talks with Micron (NASDAQ:MU) and Western Digital (NASDAQ:WDC) about a possible acquisition. No decision has been made.
- Acquiring SanDisk, which partners closely with Toshiba (OTCPK:TOSBF) on NAND flash manufacturing, would turn Micron (NAND partnership with Intel) into a heavyweight within the NAND market - Samsung and SanDisk/Toshiba are currently the market's biggest players. Micron received 32% of its August quarter revenue from flash, and 60% from DRAM. The company has been betting on 3D NAND and 3D XPoint to strengthen its flash position.
- Western has made several smaller flash-related acquisitions, as it tries to offset the gradual encroachment of SSDs/flash storage on hard drives. However, none of the buyout targets were comparable in scale to SanDisk, and Western still depends on 3rd-party NAND suppliers who also compete with the company in the SSD market.
- SanDisk +11.5% after hours to $68.90. Micron +2.6% to $18.65. Western +0.8% to $85.00.
- Earlier: SanDisk jumps on reported sale effort
Western Digital Corp. engages in the development, manufacture, and provision of data storage solutions. Its product portfolio includes hard disk drives and solid-state drives (SSD) marketed under the HGST, WD, and G-Technology brands. It also offers mobile drives for the notebook, PC, and gaming... More
Industry: Data Storage Devices
Country: United States
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