Headline: Alliance Semi: Value Story Confirmed (from LEHMAN)
ALSC VALUE STORY CONFIRMED ON BASIS OF S3 STOCK SALE ANNOUNCED 1/7 ------------------------------------------------------------------------------ UMC REPURCHASE OF S3 SHARES CONFIRMS ALSC VALUE STORY. 1/7 during market hours S3 announced it would sell 80 mil. of its 240 mil. shares in United Semiconductor Corp. for about $72 mil. (about $0.90 per share, 30NT). In addition, it could receive an additional roughly $44 mil. ($0.55 per share, 18.75NT). Our understanding is UMC is buying back the shares and, in the event of an IPO or other certain other liquidity events, then UMC will split with S3 50/50 any amount over 30NT. So, if USC goes public at a price of 67.50NT ($1.99), then S3 receives the $0.90 up front payment plus the full additional $0.55 (i.e. $1.45 per share).
BASED ON THE S3 TRANSACTION, ALSC's SHARE OF USC IS WORTH LEAST $4.15-$6.70. ALSC owns about 185 mil. shares of USC for which it paid $70 mil. at about $0.38 per share. If ALSC retains its shares and an IPO takes place at above 48.75NT, ALSC could see greater than $6.70 of value. We understand the grey market trading price of these private shares already is in the 50NT range.
ADDITIONALLY, ALSC'S OTHER JOINT VENTURES APPEAR CONSERVATIVELY TO HAVE A VALUE OF $3 PER SHARE. In addition to its $70 mil. stake in USC (which appears worth at least $4.15-$6.70), ALSC has $74 mil. invested in a Chartered joint venture and in another UMC joint venture. We believe the value of these joint ventures is at least another $125 mil..
WHY A 2 RATING WHEN ALSC IS AMONG THE 5 TOP VALUE STORIES WE COVER? ONLY BECAUSE OF ONGOING NEAR TERM LOSSES AND THE LACK OF FUNDAMENTAL MOMENTUM. WE REMAIN CONVINCED THAT $13 IS A REASONABLE 1 YEAR TARGET. WE THINK THE S3 NEWS SHOULD HELP ALSC, A KEY VICTIM OF YEAR END TAX SELLING, MOVE BACK TO THE $7 RANGE WHILE INVESTORS WAIT FOR BETTER SIGNS OF THEIR ABILITY TO MONETIZE THE VALUE OF THEIR INVESTMENT.
OTHER BACKGROUND ON USC. USC is a UMC/ALSC/S3 joint venture now running at some 25K 8 wafers per month with monthly sales of roughly $35 mil. and net profits (near 0% tax rate) of $17 mil. about 18 months after startup.
OTHER ALSC BACKGROUND. ALSC is making good strides to diversify its business. We see a strong push by ALSC to use its DRAM, SRAM, and flash expertise to move into opportunities requiring embedded memory and logic. ALSC provides the 2D platform for TDFX's-$20 3/4-NR successful Voodoo Rush product; since TDFX's integrated 2D/3D Banshee solution has been delayed, ongoing improved momentum for ALSC's graphics product still appears on track. More importantly, ALSC recently hired a new marketing head with long experience at Cirrus Logic, and we believe ALSC at last has a seriously focused effort to move into selective high growth opportunities outside of the commodity memory sector. |
