Elpida Acquisition Will Be Accretive To Micron, Part II

| About: Micron Technology (MU)
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Micron's (NASDAQ:MU) acquisition of Elpida just keeps getting better.

In today's Jeffries conference, Micron's Kipp Bedard didn't impart a lot of new information on Micron, but he did say a few interesting things about Elpida. In my previous article on Elpida, I illustrated that had it closed as of the date of the pro-forma, the acquisition would have generated $0.02 for Micron's quarterly result. In a comment to that article, I pointed to a link which states a more recent Elpida quarter clocked in at $968 million in revenue. Applying the pro-forma margin to that revenue, Elpida would have contributed $0.07 to Micron's quarterly earnings per share.

Kipp's most interesting comment on Elpida occurred at minute 20 in the recording of today's presentation. There he indicates that Elpida depreciation, "which had been running at a $420mm rate, was pushed down to $70 million." Alas, I think Kipp made a mistake here. Exhibit 99.2 of the 8k filed 2/5/13 shows Elpida had 42.892 trillion yen in depreciation for the six months ended Sept, 2012. Divide by 82.08 yen to dollar used in this 8k, multiply by 2 for a full year, divide by four to get quarterly depreciation of $261 million. Adjusting this number down to $70 million gives an adjustment of $191 million of eliminated depreciation, very close to the $195 million shown as eliminated in Note d to the pro forma consolidation shown elsewhere in the 8k. (If Kipp's math were correct, $420mm - $70mm = $350 mm in quarterly depreciation would have been eliminated in purchase accounting. Since there are roughly 1billion Micron shares outstanding, this would have been a $0.35 boost to Micron earnings instead of the $0.19 boost as derived above.)

Kipp also mentioned what has happened to the yen/dollar. Essentially, the yen has fallen about another 25% since this pro-forma was done. Micron's second quarter 10Q has this language on hedges:

As of February 28, 2013, our cumulative loss on the hedge was $168 million. In the third quarter of 2013, we recorded additional losses of $23 million on the initial hedge through its settlement on March 26, 2013. We paid $191 million on settlement. As a result of the weaker yen since the inception of the hedge on July 2, 2012, the U.S. dollar equivalent of the 200 billion yen to be paid to the secured and unsecured creditors of the Elpida Companies had decreased by $338 million as of February 28, 2013.

On March 26, 2013, we executed a series of separate currency exchange transactions to hedge our exposure to the yen-denominated acquisition payments pursuant to which we entered into below market forward contracts to buy 80 billion yen with a weighted-average price of 91.00(yen per U.S. dollar) and purchased put options to sell 80 billion yen with a weighted-average strike price of 94.24.

So Micron lovers (and I am one...), your company has already lost $191 million hedging this transaction through February 28, 2013. And the geniuses in Micron's treasury department, reading some other newspapers than we do and assuming heroic things for the Japanese economy, has RE-hedged 80 billion yen or 40% of the transaction cost at a price of (91 + 94.24)/2 = 92.62 yen and thus has lost another ~6 yen based on today's price of 98.87 yen/ dollar. Another $56 million in hedging losses. But enough bad news. The yen/dollar swing of about 20 yen since the deal was struck is about $511 million to the good. Lop off a mere $247 million in cumulative hedging losses (and these are the real cash kind of loss) = $264 million. Divide that by Micron's billion shares and we should have a one time event of another $0.26 per share when the deal closes, if we don't hedge more of that away!

During today's Jeffries meeting, Kipp said that Elpida was operating on a cash flow positive basis. That, coupled with the indication in the most recent 10Q that Micron hasn't needed to fund Elpida's cap ex, should argue for a larger PP&E. And that in turn may mean the PP&E purchase accounting pushdown could be larger. And that in turn means the purchase accounting depreciation elimination could be greater. And that in turn means Elpida could be even more accretive than the $0.07 per quarter mentioned above.

Describing one benefit of integration, Kipp pointed out that NAND which Elpida is buying is now done on the open market. He implied that consolidation with Micron would be a benefit (although I'd like to see the inter-division transfer pricing.)

Finally, Kipp volunteered that Elpida's backend testing and qualification costs 2X what they are experiencing, and they will benefit in this area once Micron owns them:

We haven't bought any back end test equipment in a decade.

I know that back end is the smaller part of the whole equation, but I love the notion of cutting a significant cost in half. (Russ? Ephud? RJackson? ideas on what this might do for margin?)

Conclusion. A great deal is getting better. Kipp said that we are one month into a typical 2-4 month review process with the relevant Japanese court reviewing the bond holder appeal. While some pundits have said "with the falling yen, what's the harm in waiting?", clearly a quicker close and tighter integration would be good. Booking a $0.26 one time gain would be wonderful as well.

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.