Dan Scovel of Needham & Alliance CFO David Eichler take on the TSEM deal:
Alliance Semiconductor invests $75M in Tower
by Olaf de Senerpont Domis and Neal Sandler in Tel Aviv
reporters@thedailydeal.com
Aiming to repeat past investment successes, memory chip designer Alliance Semiconductor Corp. said Wednesday it would invest $75 million in Tower Semiconductor Ltd.
The investment would provide Alliance, of Santa Clara, Calif., with roughly 10% equity in Tower, based in Migdal Haemek, Israel. Tower will use the funds toward construction of a semiconductor fabrication facility, or "fab."
Like its much larger brethren in the semiconductor industry, such as Intel Corp., Alliance, which has no fabrication facility, has scored some major coups with its investments. Through its venture arm Alliance Ventures, it has seen stakes in small chip startups balloon as they were bought out by the most acquisitive firms in the rapidly consolidating chip industry: Broadcom Corp., PMC Sierra Corp. and Vitesse Semiconductor Corp.
Alliance - independent of its venture arm - also has invested in other fab ventures, such as a roughly $100 million stake it took in United Microelectronics Corp., according to Dan Scovel, an analyst with Needham & Co. in New York. That investment has grown to roughly $1 billion worth of United stock, he said.
"Alliance has a history of doing very well with these fab deals," Scovel said.
Besides receiving all-important guaranteed chip production capacity at the new fab, scheduled to be built by 2002, the Tower deal brings Alliance a sizable equity position in a company it considers to be undervalued by investors, Alliance CFO David Eichler said in an interview.
"The market valuation of Tower is very low, and we consider that erroneous," Eichler said.
Tower stock rose 4% in Nasdaq trading Wednesday to close at $29.38. Alliance shares dipped 0.5% on the Nasdaq to close at $25.88.
Alliance will invest the $75 million in several stages over 18 months as Tower meets certain milestones, such as the receipt of construction permits and $350 million in grants from the Israeli government, Eichler said.
Of prime importance, said Eichler, is the new fab incorporating Toshiba Semiconductor's cutting-edge technology for building flash memory chips, which are semiconductors - often used in handheld electronic devices - whose memory can be rewritten and retained without need for a power supply.
"We've been trying to get into the flash area for some time, and this gives us access to Toshiba's cutting-edge process technology," Eichler said.
Alliance's investment is part of Tower's plan to raise $1.5 billion to build its chip fab, which will be located in Israel. So far, Japan's Toshiba has invested $10 million for a 3% stake in Tower with an option to increase its investment. SanDisk Corp. of Sunnyvale, Calif., like Alliance, got a 10% stake for $75 million.
Tower's co-chief executive Yoav Nissan-Cohen said his company aims to raise up to $400 million in the coming months from other chip designers in exchange for equity stakes.
About $550 million of funding is expected from bank loans, and $350 in government grants, he said. Financing is expected to be completed by the end of the third quarter.
After the capital is raised, Alliance and SanDisk will retain 10% stakes in Tower. Israel Corp. of Tel Aviv will own 20%, and other partners will hold approximately 30%. The remaining stake will continue to be publicly traded. Israel Corp. currently is the largest single shareholder with a 45% stake in Tower.
Tower retained Tel Aviv law firm Yigal Arnon & Co. for outside counsel. Alliance relied upon its general counsel, Brad Perkins. Neither company hired an investment bank.
As part of the deal announced Wednesday, Alliance chairman, president and CEO N.D. Reddy will join Tower's board.
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