Microsemi Corporation Announces Revised Proposal to Acquire PMC-Sierra, Inc …

31 Oct 2015 | Author: | No comments yet »

Microsemi Fights for PMC-Sierra; Ups Bid to $11.88/Shr.

Microsemi Corp. hiked its offer to buy PMC-Sierra Inc. to about $2.33 billion (U.S.), topping a $2.27-billion bid from Skyworks Solutions Inc. and extending – but perhaps not ending – a bidding war that started almost two weeks ago. Microsemi’s latest cash-and-stock offer values PMC at $11.88 a share, up 3.7% from its previous offer, based on Microsemi’s closing price Thursday. Microsemi launched its latest offer less than five hours after Skyworks raised its bid, pushing PMC-Sierra’s shares to a more-than nine-year high of $12.08 on Friday. “From Skyworks’ side, we do believe that up to $12.50 still makes sense for them to do it, so I think there is still a little play left,” D.A. The new bid is $9.04 in cash and 0.0771 of Microsemi’s common stock per share, compared with an all-cash bid of $11.60 a share made earlier Friday by Skyworks.

The wireless chipmaker has boosted its offer for PMC-Sierra (PMCS) by 10% to $2.24 billion, topping for now the rival offer that emerged earlier this month from Microsemi (MSCC). Aliso Viejo, Calif.-based Microsemi, which also makes chip equipment and provides software for cloud data, has been trying to build up its communications business at a time of surging demand for data storage on the cloud.

Peterson in a statement released today. “Our offer is more strategic, offers more certainty in terms of closing approval process and timing, and at a higher price than the Skyworks proposal. Skyworks, a supplier to Apple Inc., makes chips used in radio frequency and mobile communications systems, and the Woburn, Mass., company is trying to diversify beyond its dependence on chips for smartphones. Shareholders receive cash now as well as the opportunity to participate in the significant upside potential of a global analog and mixed-signal leader with a highly diversified platform for growth and profitability.” RBC analyst Mitch Steves maintains that the Microsemi offer is 25% accretive to 2017 earnings, which would add $1 a share to EPS.

Microsemi could use stock to offer as much as $15 per share, but is more likely to take the bidding to between $12.50 and $13 a share before walking away, Mitch Steves, an analyst at RBC Capital Markets, wrote in a note to investors. The latest offers announced Friday represent more than a 50% premium to PMC’s stock price when the first deal with Skyworks—valued at $2 billion, or $10.50 a share—was announced Oct. 5. Assuming Skyworks returns with a topping bid and Microsemi uses stock to fund a new transaction, we note that the Company could pay up to $15/share (neutral to EPS) while a more reasonable assumption of $12.50/share (30% stock/70% cash) would lead to ~$0.43 in accretion or +13% in year one earnings ($0.80 in year 2). Skyworks, which has no debt, could, if it decided to borrow, make all-cash offers that would exceed what Microsemi could put on the table, Steves wrote.

PMC-Sierra rose 2.4 percent to $11.92 at the close in New York, its highest level since May 2006, indicating that investors expect a higher bid to come. Microsemi added that it sees the deal adding immediately to its adjusted earnings and free cash flow, thanks in part to more than $100 million in annual cost synergies.

MSCC at ~19% While on its face the Microsemi bid seems to be stronger than the bid placed by SWKS, we have reservations regarding the stock exchange aspect of the bid. The company, which reported sales declines in two of the past three years, had hired a financial adviser to seek a sale of the company, people familiar with the matter had said. And according to Citigroup’s Malik, the higher bid will add $200 million in debt for Skyworks and the interest expense will decrease the deal’s potential EPS accretion by 4 cents.

Skyworks, meanwhile, has said the acquisition is aimed at boosting its products geared to handling a growing class of computing chores known by the phrase Big Data. We believe that the handset market is beginning to slow and in order for Skyworks to continue to grow above the market they will need to diversify the revenue base away from handsets. Based on the $2.925B in debt committed to Microsemi by their bankers to acquire PMCS and refinance their existing debt, we calculate that Microsemi has an additional $458M in equity that they could add to the deal, if necessary. The acquisition of PMC-Sierra will give Skyworks capabilities in the storage market and outside of PMC-Sierra there is a limited set of viable companies to acquire in that end market.

Assuming no change in the equity portion of the offering and no additional debt (above the $2.925B) this would make ~$14.30 the maximum that Microsemi could bid for PMCS, which account for ~$11.38 in the cash portion of the offer. Microsemi also makes chips for the military, specializing in parts that can withstand the rigors of environments that include things like radiation what would fry normal semiconductor products. The Woburn, Mass.-based Skyworks, which generates a big chunk of its revenue from China, has been battered lately as concerns over growth in China have intensified. Skyworks and PMC added that their deal would close in the first half of 2016, subject to PMC shareholder approval, receipt of regulatory approvals and other customary closing conditions.

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