Let's assume there is enough free cash flow (before paying dividends) to cover debt service costs, as you have suggested. Then there is also the little item of issuing more WDC shares to cover the 0.2387 WDC payment for each of SanDisk's 201 million shares. WDC called a shareholder meeting to authorize issuing more shares to cover the deal, which works out to a need for about 48 million more shares. This will increase the total number of WDC shares by about 22%, causing earnings dilution as well as a bigger dividend payout if the dividend rate remains the same as last year.
Meanwhile, as your data show, FCF has been falling for both companies. I find it difficult to believe that FDF will continue to fall for SNDK, given its increasing business supplying SSD for enterprise servers. But who knows? Especially in the current economic climate, where Europe is still struggling, and China is predicting even lower growth than last year, you could see pricing pressures on flash memory as well as on hard drives.
I'm inclined to dispose of my remaining SNDK shares prior to completion of the merger, in expectation that the share price of WDC will fall at least somewhat by year end. After that, I might want to reinvest. As a further hedge on unfavorable news, I previously sold covered calls on a portion of my SNDK holdings, with striking price of $80 and expiration January 2017. That transaction was made while the deal with Tsinghua was still on, and the price of SNDK was about $77. I may let those call options expire worthless and collect cash and WDC shares on the underlying SNDK shares.
There is enough uncertainty over future profits of the combined companies to warrant my not putting all my eggs in one basket.
Art |
