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Phillips Deal Cancellation Creates Speedbump for Western Digial (WDC)/SanDisk (SNDK) Deal - Summit Research

January 26, 2016 8:46 AM EST
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Price: $79.12 --0%

Rating Summary:
    9 Buy, 22 Hold, 8 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 6 | Down: 3 | New: 1
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Summit Research analyst, Srini Sundararajan, sees the cancellation of the Limileds sale as a positive for Cree (NASDAQ: CREE) which may have been spared a price war. The cancellation also presents problems for the Western Digial (NYSE: WDC)/SanDisk (NASDAQ: SNDK) merger but the analyst believes these problems are not insurmountable and the deal will go through. No change to SNDK Buy rating or $85.50 PT.

Philips announced that it has cancelled a $3.3B enterprise value deal to sell an 80.1% stake in its Lumileds LED and automotive lighting unit to GO Scale Capital a Chinese private equity fund under the GSR Capital family of funds. This cancellation follows unspecified objections from the Committee on Foreign Investment in the United States (CFIUS) on this deal (originally inked in March 2015). Prior to this, Philips had announced in Oct. 2015 that the 80.1% majority stake sale was in doubt, due to unspecified CFIUS concerns.

CREE should be happy that a “flood the market” type budding Chinese competition has not been given the green light.

Possibilities of why CFIUS may be concerned are: A) LEDs could be used to Li-Fi (like WiFi but instead of using radiowaves, it uses flickering of LED light to enable WiFi-like communications at higher speeds than WiFi); or B) WiFi connected LED bulbs that can be remotely controlled (a particular example of internet of things (IoT) type application) and hence hacked when the hacker is at a short distance away.

Considering the CFIUS' response, the analyst believes the Unisplendour investment is more than likely to be stalled if not blocked. Semiconductor technology is of much more strategic importance to U.S. security than LED technology. Though it is only for a 15% stake, and, though it is likely that Intel, with its Unigroup investment, blessed the deal, the fact that MOFCOM approved the WDC-HGST’s 2012 deal just prior to the SanDisk purchase means that this is likely a quid-pro-quo of strategic importance to China. With a 15% stake for ~$3.8B and a board seat, it's likely that the Chinese would have gotten access to the latest and greatest storage IP technologies for both hard disk drive and solid state drive. Therefore, we do not anticipate CFIUS approval to be forthcoming for this deal.

Subject to Unisplendour deal closing, WDC offered to pay $85.10 in cash and 0.0176 shares of WDC per share of SNDK. On the other hand, if the Unisplendour transaction has not closed or has been terminated, WDC had offered $67.50 in cash and 0.2387 shares of WDC per share of SNDK. To finance the deal, WDC had planned to raise $17.4B in new debt and $1B in revolving credit facility and use the proceeds for the acquisition and to refinance WDC and SNDK debt.



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