Post its acquisition of Elpida Memory, Micron Technology (NASDAQ:MU) is expected to overtake Hynix to become the second largest dynamic random access memory (DRAM) chips manufacturer behind market leader Samsung (SSNLF). Apart from the direct benefits to the company, we believe that Micron could also gain from the resultant consolidation in the DRAM market. The DRAM industry has been plagued with persistent oversupply, which has put further downward pressure on already declining DRAM prices.
However, the deal was finalized in July and it hit a roadblock the same month when Elpida’s bondholders resisted the deal, claiming that the $2.5 billion takeover bid by Micron undervalued the company’s assets. (Read: Bondholders Could Torpedo Micron-Elpida Deal) The bondholders had planned to seek approval from the Japanese district court to present a counter proposal. Earlier this weak, along with an investment fund that holds Elpida bonds, the bondholders submitted an original reconstruction plan to the district court.
Micron Offers $2.5 Billion For Elpida
The sponsor agreement signed between Elpida and Micron in July 2012 values the total bid at $2.5 billion. Micron will be granted 100% equity of Elpida for $750 million, which is to be paid in cash at the closing of the transaction. Additionally, the company will pay $1.75 billion in future annual installments through 2019 from the cash flows generated from Micron’s payment for foundry services provided by Elpida as its subsidiary. The payments received from Micron will help Elpida fully discharge its pre-petition debt obligations.
The July sponsor agreement is subject to approval by the court, and Elpida has a deadline of August 21, 2012, to submit its revival plan.
Bondholders Advocate An Alternate Sponsor
The group of bondholders opposing the deal hold over 70% of the bonds that Elpida defaulted on after filing for bankruptcy.  The bondholders feel that the $2.5 billion deal does not do justice to Elpida’s full worth. They submitted their own plan on Tuesday that includes 30 billion yen in outstanding loans to the company, and seeks cooperation from Elpida’s security holders to find an alternate rehabilitation sponsor for the company.  The increasing resistance could delay the acquisition, which is expected to be closed by 2013, by postponing the August deadline for Elpida to submit the rehabilitation plan.
Currently, Micron accounts for close to 10% of the DRAM market, which we estimate will go up to 13% by the end of our forecast period. Accounting for close to 60% of the company’s valuation, the DRAM memory segment is the most important division in Micron’s portfolio. With Elpida on board, the company can almost double its market share, leading to a potential upside in its future valuation.
We have a Trefis price estimate of $7.22 for Micron, which is at a premium of around 10% to the current market price.Notes:
- Elpida Bondholders Tell Court Micron Buyout Bid Too Cheap, Bloomberg, August 14, 2012 [↩]
- Elpida creditors submit original reconstruction plan to court, Daily Yomiuri Online, August 15, 2012 [↩]