Why Is Cree Selling-Off Its Power & RF Business (“Wolfspeed”) To Infineon?

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In a move to increase its resources and become a more focused LED lighting company, leading LED manufacturer Cree (NASDAQ:CREE) announced the execution of a definitive agreement to sell its Power & RF business (“Wolfspeed”) to Infineon yesterday. In May 2015, the company  had announced its decision to spin-off its Power & RF business into a separate publicly traded company, with a proposed name of Wolfspeed. The company was expected to execute the IPO of Wolfspeed in fiscal 2016.  (Read Cree’s Press Release) However, Cree said that it never executed the IPO because it was approached by other companies interested in purchasing its Power & RF business.

Move To Help Cree Become A More Focused LED Lighting Company

Cree’s profitability in the LED products business has been suffering due to end-market excess supply and the resulting dramatic price decreases. The past year has been a tough one for the LED industry, as margins have squeezed to a point where it has become increasingly difficult for a large number of companies to stay afloat. The gross profits margins for Cree’s LED and lighting businesses have declined significantly over the last few years. In 2015, the company suffered a net loss for the first time in the last 10 years.

Gross Profit Margin Decline

In an effort to reduce excess capacity and overhead to improve the LED cost structure, the company initiated restructuring plans last fiscal year, though excess supply and pricing pressure remain. Cree’s gross margins are starting to stabilize, as the benefits of its restructuring efforts appear.  That said, top-line growth still remains a concern. A delay in new products launches and slower than expected demand for lighting products has further pressured the stock, as did the guidance miss with Q3’16 results. We believe that the move to sell-off its Power & RF business will help Cree focus exclusively on revamping its LED and lighting businesses.

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Sell-Off  To Help Improve Cree’s Cash Position

Massive declines in the LED margins and a slow top-line growth along with Cree’s restructuring efforts have together worsened Cree’s cash position in the last two years. Moreover, Cree’s debt has increased during the same period.

Cash_Position

The sell-off of the Wolfspeed Power unit for $850 million in cash to Infineon will help Cree gain an edge over its industry peers, which are finding difficult to stay afloat. Unable to sustain the massive price declines in the LED industry and a slowdown in China, around  4000 LED companies in China exited the market in 2015. [1] Further, Cree can use the cash to pay-off its debt and use the remaining cash to make its LED and lighting business more efficient.

Short-term Profits Might Suffer

Cree has a broad portfolio of the most field-tested SiC and GaN power and wireless technologies and products in the market. In July 2015, Cree acquired Arkansas Power Electronics International (APEI), a global leader in power modules and power electronics applications. Combining two highly complementary innovators, the acquisition enabled Cree’s Power and RF business to extend its leadership position and accelerate the market for high-performance, best-in-class SiC power modules. By acquiring Wolfspeed, Infineon will be able to gain an edge over its peers in the race for leading IoT (Internet of Things) market and the connected car market that would extensively use wireless networks.

However, Cree might suffer short term decline in its profitability by selling-off this segment. This comes from the fact that while the Power and RF division accounts for less than 10% of Cree’s total revenue, the division is much more profitable compared to LED and Lighting products. Power and RF products offer gross margin in excess of 50% as compared to 28% and 26% earned on LED products and lighting products, respectively. Nonetheless, we believe that the company can leverage its vertically integrated model for cost improvements to improve margins going forward.

See Our Complete Analysis for Cree Here

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Notes:
  1. LED Component Market Saw Sluggish Growth In 2015, Strategies Unlimited, February 2016 []