Chinese company buys nearly $4-billion stake in Western Digital

1 Oct 2015 | Author: | No comments yet »

China’s government-controlled Tsinghua will buy 15 percent of Irvine-based Western Digital for $3.8 billion to become its biggest shareholder.

A unit of China’s Tsinghua Unigroup Ltd. agreed to pay $3.78 billion for a 15% stake in Western Digital Corp., an Irvine-based maker of data-storage disk drives, the companies said Wednesday. 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. The deal marked the latest effort by the state-controlled Chinese company to expand its overseas holdings, while also giving Western Digital a cash infusion to aid its growth.

Unisplendour, a subsidiary of the business affiliate of one of China’s top universities, will pay a premium of about 30 percent for the stake and will get the right to nominate one board member. 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. Weiguo Zhao, chairman of Tsinghua Unigroup and Unisplendour, in turn praised Western Digital for having “a capable and talented management team and workforce.” But it has grappled with slowing growth in some markets, such as personal computers, and its stock had tumbled 38% so far this year before Wednesday’s announcement. 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. The investment is Unisplendour’s second multibillion-dollar deal this year, and it underscores how state-controlled Chinese companies have made increasingly large investments in American technology companies in the hopes of gaining prestige and expertise. Tsinghua Unigroup this summer reportedly was preparing an offer of about $23 billion to acquire Micron Technology Inc., a leading U.S. semiconductor maker.

The deal also presents a new test to American regulators charged with overseeing investments into industries that could have national security implications. Additionally, there is the optionality of a favorable ruling from MOFCOM (China’s Ministry of Commerce), which we think this new relationship certainly doesn’t hurt and that could potentially generate 30% upside to FY17 EPS and $750 million in free cash flow.

The company is controlled by the Chinese government, and the son of Hu Jintao, the former Chinese president, was once its party secretary, a position responsible for communicating and cooperating with the Chinese Communist Party. 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. Tsinghua Holdings also made an informal bid of $23 billion for the American memory chip maker Micron Technology in July through another subsidiary, called Tsinghua Unigroup. As one of America’s largest makers of hard drives, which are used in data centers across the country that support American banks, social media sites and even the military, Western Digital could be considered a problematic takeover target.

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. Amit Darynani with RBC Capital, who has an Outperform rating on Western, and a $94 price target, writes that “the cash infusion bolsters WDC’s already strong balance sheet (net cash at $2.7B) and takes the possible cash position to ~$6.5B post the Unis investment.” “Flash and Systems have both been key focus points for WDC and we could see the company take a bigger step in both these directions from an M&A Perspective,” he opines. “We note that WDC buying Sandisk is a combination that investors have consistently talked about.” We apply a ~13x FY16E P/E multiple (above the ~11x historical average for WDC) to arrive at our $94 price target. According to the report, an unidentified hacking group was able to download spyware to carry out surveillance on computers across the globe through firmware in storage systems from a number of companies, including Western Digital.

The concerns around data storage could prompt a review by the Committee on Foreign Investment in the United States, which reviews company acquisitions and investments that could pose threats to American security. The new relationship may also help Western Digital with a longstanding issue it has had with China’s Ministry of Commerce, which has long held up approval of Western Digital’s 2012 acquisition of Hitachi Global Storage Technology.

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