Memory chip manufacturer Micron Technology Inc. (MU) recently announced that it will sell its wafer manufacturing facility in Nishiwaki City, Hyogo, Japan, to TowerJazz. Specialty foundry Tower Semiconductor Ltd. (TSEM) and its fully owned U.S. subsidiary Jazz Semiconductor operate collectively under the brand name TowerJazz. The agreement between the two companies is still in a non-binding stage and signing of a definitive deal is underway.
The deal has been valued at $140.0 million, of which roughly $40.0 million will be paid in cash and approximately 20 million through TowerJazz ordinary shares, which will be issued either to Micron Technology or its Japanese subsidiary. The remaining consideration will be paid out to retiring Micron employees as long-term retirement benefits.
Headquartered in Israel, TowerJazz manufactures integrated circuits for more than 150 customers worldwide. It specializes in making image sensors used in medical and dental x-rays, mobile phone and digital cameras as well as radio-frequency and embedded memory chips.
The additional capacity from Micron as well as market opportunities in Japan should allow TowerJazz to achieve its $1.0 billion annual revenue goal by 2014, through the doubling of its manufacturing capacity. The company reported revenues of $509 million in 2010.
If the deal materializes, the companies will look to enter into a supply agreement, under which TowerJazz will manufacture DRAM memory devices in its newly acquired Micron facility in Japan for roughly three years. These moves are perhaps being planned as Micron’s Japanese facility was unaffected by the earthquake and tsunami in Japan last month.
We believe that Micron’s facility could prove quite beneficial for TowerJazz. The feeling is similar for Micron, which should also benefit from this divestiture. Though Micron asserted that its Japan facility was doing fine after the disaster, we think that suspended operations at wafer-manufacturers Shin-Etsu Chemical and MEMC Electronic Materials Inc. (WFR) will adversely affect the supply of wafers, in turn disrupting Micron’s DRAM chip production capabilities.
We remain encouraged with Micron’s second quarter 2011 results, as both top and bottom lines exceeded Zacks Consensus Estimates. However, average selling price declines noticed during the quarter, competition from SanDisk Inc. (SNDK) and pending lawsuits are concerns.
Micron Technology has a Zacks #3 Rank, implying a short-term Hold recommendation.
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