Dear All: Let's discuss the deal between MU and Hynix under the conditions
currently on the table and how MU's stock price should react. Below is my
view to get this started. But first a summary of the current financial situation
at Hynix:
After the debt restructuring agreed in November, the situation looks like this:
| Old | Actions | New
------------------------------------------------------------------------
Foreign Debt | USD 1.14 billion | None | USD 1.14 billion
| | |
Korean Debt, | | New debt | KRW 0.66 trillion
New | | KRW 0.66 trillion | =USD 0.50 billion
| | =USD 0.50 billion |
| | |
Korean Debt, | KRW 8.64 trillion | Debt write-off | KRW 4.24 trillion
Old | =USD 6.57 billion | KRW 1.4 trillion | =USD 3.19 billion
| | =USD 1.06 billion |
| | |
| | Debt-equity swap |
| | KRW 3 trillion |
| | =USD 2.28 billion |
------------------------------------------------------------------------
Total Debt | USD 7.71 billion | | USD 4.83 billion
According to the posting on Hynix' web site with details on the convertible bond
used for the d-e swap it is based on a share price of KRW 3,100. This implies a
valuation of current outstanding shares of KRW 3.6 trillion (=USD 2.74 billion),
giving creditors a 45.5% share of Hynix. Note that the KRW 3,100 are a max.
price, i.e.:
- if Hynix manages to get its shares above KRW 3,100, creditors' share will
decrease below 45.5%
- if Hynix share price is below KRW 3,100, conversion price will be adjusted down
to market price, so creditors still won't get more than 45.5% of the company
The current share price is only KRW 2,530, so at the moment creditors will get
the targeted 45.5% of the company.
Moreover, MU recently demanded that creditors provide fresh debt of another USD
1.15 billion in return for MU raising the price to around USD 4 billion. This
number exactly matches the foreign debt, so it could be that MU wants to take
foreign creditors out of the picture. But it could also be coincidence and MU
just wants the money to upgrade Hynix fabs.
So much for the situation. Now let's look at the deal:
Micron acquires Hynix' DRAM operations at the conditions currently under
discussion, i.e.
- price tag around $4 billion
- paid entirely or largely in MU stock
Is this a good deal or not?
Firstly, I would argue that this is quite cheap for MU:
- MU will have paid a 79% premium over Hynix' current market value of KRW 2.94
trillion (=USD 2.24 billion). However:
- for a capacity of 20% of the total market, MU will pay USD 4 billion, i.e. only
USD 0.2 billion per 1% market share
- compare MU: 22% market share, value USD 20 billion, i.e. USD 0.9 billion per 1%
market share
- compare IFX: 14% market share, value 14.5 billion, of which maybe 60% is for
the DRAM part, i.e. USD 0.6 billion per 1% market share
- but IFX and MU have only around USD 1 billion in debt
- so, to maintain its D/E, MU should calculate about another USD 4 billion or so
which it will need to retire Hynix debt
- i.e., actual cost for MU to acquire Hynix 20% market share and bring down its
D/E to MU's own level will be around USD 8 billion
- this then comes down to a price of USD 0.4 billion per 1% market share, which
is still cheap
- all of this while leaving MU with enough cash to upgrade the Hynix fabs (if
it's an equity deal)
Well, these are the advantages of buying a distressed company. It's cheap!
Secondly, I would even argue that existing shareholder equity value will
increase:
- for USD 4 billion Hynix shareholders need to get about 20% of MU at a market
valuation of MU of around USD 20 billion
- i.e., MU will need to dilute existing shareholders' equity by 20%
- but, MU will almost double its market share
- so, even with a risk premium for the fact that they have to upgrade Hynix fabs
etc., current MU shareholders should still be much better off than without the
deal
Thirdly, all of this doesn't even take into account the effect on the DRAM
market, i.e. tighter control of supply and the resulting higher prices. Which, of
course, will also have a positive effect on MU's valuation.
So, I would say:
- MU should try to close the deal at these conditions before Hynix walks away
- creditors need not give in to MU's demand for a new loan of USD 1.15 billion
to sweeten the deal
- both Hynix and MU shareholders will benefit from a significantly higher valuation
- IFX theoretically could up its offer to about 30% of it's own equity and still
get a good deal - but in the end will have to give in because MU's equity is
valued so much higher by the market than its own
Let's discuss!
ohkami |
