Benefits of Micron's (MU) Deal to Acquire Remaining Stake in Inotera Seen as Slightly Puzzling, Says Analyst

Deutsche Bank maintained a Buy rating on Micron Technology (NASDAQ: MU) with a price target of $20. Earlier Micron said it will acquire the remaining shares of Inotera in a deal valued at $3.2 billion. Micron had owned 33% of the company.

Commenting the development, analyst Sidney Ho said, "While the transaction will increase MU’s scale and cash flow generation, we are a bit puzzled given the economic benefits that MU is currently enjoying as a minority investor."

"Specifically, 100% of Inotera’s DRAM output is sold to MU at cost-plus (which will switch to margin-sharing starting in 2016), and MU is not responsible for Inotera’s capex for its ~100k wspm capacity," continued the analyst.

Ho added, "We suspect that the potential for a buyout was brought up as part of the annual negotiation of the supply agreement. Perhaps given the strategic importance of Inotera, who currently supplies 35% of MU’s DRAM production, MU believes it needs to have better control of Inotera’s technology migration and manufacturing process. We also think by owning 100% of Inotera, MU may benefit from additional flexibility for its manufacturing network, as MU seems unwilling to use Inotera’s capacity in the past to produce products other than DRAM."

For an analyst ratings summary and ratings history on Micron Technology click here. For more ratings news on Micron Technology click here.

Shares of Micron Technology closed at $14.04 yesterday.

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