"On the one hand you have stated how valuable SanDisk is, and suggest that WDC is purchasing at a bargain price. Yet you believe debt that facilitates this bargain purchase is not in the interest of WDC shareholders."
The 7.375% rate on a secured note is one of the highest I've seen in a period of historically low interest rates. The underwriters, it must be assumed, saw that there were risks in the amount of borrowing that WDC has to do in order to buy SanDisk. Yes, SanDisk can be considered a bargain at a purchase price of approximately $78 per share, which includes about .23 share of WDC. It's a bargain because I believe SanDisk has state-of-the-art NAND technology -- just as good as Samsung's, or for that matter, Intel. SanDisk is also one of the lowest cost producers -- much lower cost than Micron, and probably lower cost than Hynix. You can't tell what Samsung costs are, because Samsung doesn't break them out of their overall semiconductor production.
Bond underwriters are eager to get as big a spread between their cost of funds and what they receive in return when the bonds are finally issued on the market. They want at least 100% of face value, and the 7.375% rate ensures they'll get it. And that's the lowest rate, apparently, that Western Digital is getting on its overall borrowing, since the rest is in the form of junk bonds yielding over 10%. Taken together, the debt service costs will be a drag on earnings for many years, unless demand for flash memory, especially for enterprise servers just keeps soaring unabated. Continued huge demand growth is possible, but there are risks entailed in this assumption. Not only that, the Chinese are making a huge effort to build their own flash memory capabilities and are likely to capture somewhere near 10% of worldwide demand within the next two or three years. That much extra capacity could weaken prices for flash memory, placing pressure on margins.
My views are not contradictory but merely suggest that WDC is putting up a good proportion of its assets to buy a remarkably good additional asset -- and not without risk.
There is a difference between what is a bargain and what is affordable.
Art |
