Arm of China-Controlled Tsinghua to Buy 15% Stake in Western Digital

30 Sep 2015 | Author: | No comments yet »

Arm of China-Controlled Tsinghua to Buy 15% Stake in Western Digital.

Shares of hard drive maker Western Digital (WDC) are up $9.68 or 14%, at $78.75, after the company said it got an equity investment of nearly $4 billion from Unisplendour, a division of Chinese government-backed Tsinghua Unigroup, at a 56% premium to Western’s stock value yesterday. Chinese information-technology firm Tsinghua Unisplendour Corp. agreed to make a $3.8 billion equity investment in Western Digital Corp. through a subsidiary.

Tsinghua has been coming up a lot the last couple years: rumored as a bidder for Micron Technology (MU); the recipient of a minority investment from Intel (INTC); the acquirer of wireless chip maker Spreadtrum; the acquirer of a 51% stake in Hewlett-Packard‘s (HPQ) storage business, and on and on. The investment by Unisplendour buys it 15% of Western, in newly minted shares, valuing the company at $25 billion, or $92.50 per share, which is 33% above yesterday’s close of $69.37. The deal would make the Chinese government-controlled company Western Digital’s biggest shareholder and mark the latest in a wave of acquisitions abroad by the country’s corporations, part of President Xi Jinping’s efforts to elevate their global influence.

Unisplendour agree to a five-year lock-up on its shares, “with a limited number of shares becoming available for transfer each year.” Western said it would use the money to strengthen its balance sheet, “providing financial flexibility and pursuing long-term strategic growth initiatives.” Weiguo Zhao, the chairman of Tsinghua Unigroup, said “We believe this long-term investment will serve as a constructive collaboration model for Chinese and U.S. companies to work together for success.” Among early responses, Wells Fargo’s Maynard Um, who has an Outperform rating on the shares, writes that the investment provides Western “with some flexibility in pursuing long-term strategic options given the changing industry dynamics and pressures in some of the core businesses.” We continue to believe Western Digital’s fundamentals will likely improve with potential for gross margin upside vs. the 27-32% target, continued higher free cash flow generation above net income. The Western Digital deal is Unisplendour’s biggest acquisition this year after agreeing in May to pay $2.3 billion for a controlling stake in Hewlett-Packard Co.’s local server venture. Tsinghua, one of China’s most prestigious universities, had also been interested in buying U.S. memory-chip maker Micron Corp. through its Tsinghua Unigroup arm, people familiar with the matter have said.

And Mehdi Hosseini with Susquehanna reiterates a “Positive” rating, writing that “This, in our view, highlights attractive valuation that HDD stocks (particularly WDC) offer while also underscoring the growth prospects of Datacenters in China.” We expect this transaction to also lead to MOFCOM agreement that bodes well for both WDC and STX. For Western Digital, the deal with politically connected Tsinghua comes as it seeks to satisfy Chinese regulatory concerns about its purchase of Hitachi Ltd.’s former storage business, Hitachi Global Storage Technologies, which it bought in 2012 for about $4.3 billion. Wednesday’s announcement comes a week after Xi’s state visit to the U.S. where he met with the country’s technology leaders, including Apple Inc. In that context, today’s announcement suggests China is not interested in exporting �cheap� HDD, DRAM or NAND components, but rather seriously looking to safeguard the supply of necessary components needed as it starts to build out its Datacenters.

Chief Executive Steve Milligan said in Western Digital’s quarterly earnings call in July that they had made “meaningful progress” with China’s Ministry of Commerce and hoped the agency would give a favorable ruling “in the near future.” Tsinghua Unigroup has sought purchases in the U.S. as it looks to further Beijing’s aims of building up a homegrown technology industry. Because it’s taking only a minority stake, the deal is not expected to face review by the Committee on Foreign Investment in the United States, Western Digital said in a statement. Even as the country’s Internet industry has surged in size and sophistication, China still relies on foreign companies for basics like chips and other components. That dependence came under official scrutiny after former U.S. contractor Edward Snowden’s revelations that U.S. intelligence used U.S.-made equipment for espionage purposes. Western Digital, which has seen its profit hit from the declining personal-computer industry, said the investment will help facilitate growth as the global data-storage industry changes.

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