Micron's (MU) Inotera Deal is an Expensive Use of Equity - Needham & Company

Needham & Company analyst, Rajvindra Gill, is questioning why Micron (NYSE: MU) would use equity to pay for a transaction that seems to only offer accounting benefits when the stock is trading near 3 year lows. Considering that DRAM ASPs have declined for each of the last 3 quarters, the upside appears limited. No change to Hold rating.

Micron announced an agreement to acquire Inotera’s remaining shares for NT$30 per share, or a 30% premium to yesterday’s close of NT$23. Micron already owns 33% of Inotera and purchases its entire 100k wpm DRAM output. The remaining 67% represents an enterprise value of ~$3.2B, or ~2.2x TTM EBITDA. Micron expects to fund the transaction with $2.5B of debt and up to $1B of equity.

Revenue and market dynamics are expected to remain unchanged as Micron already purchases 100% of Inotera’s output. The deal is, however, expected to be accretive to GM% by ~4% due to streamlined operations and purchase accounting. Beyond this, there appears to be limited impact to Micron’s P&L. The analyst believes a large motivator of the transaction was gaining access to Inotera’s FCF ($2B since 2013) to invest in non-DRAM portions of the business.

In February, Micron amended its relationship with Inotera beginning in 2016. Micron was previously receiving a fixed margin from Inotera products that was well below its standalone DRAM margins at the time the amended agreement was announced. The previous agreement was set to expire at the end of 2015 with a margin sharing arrangement replacing it in 2016. Checks at the time indicated that DRAM GM% related to Inotera would increase 15-20% at flat pricing at the time of the updated agreement. Given the historically weak PC market that developed this summer upside from a full ownership stake in Inotera and margin sharing is limited. Micron’s total DRAM ASPs declined 4%, 10% and 7% each of the last three quarters respectively.

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 $13.66 yesterday.

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