The share price of Israeli chip producer Tower Semiconductor (TASE: TSEM; Nasdaq: TSEM) has been steadily declining in recent months, and getting further and further away from the price the company’s shareholders are due to receive in the acquisition by Intel. At the end of last week, Tower was traded at $40 on Nasdaq, 24% below the price of $53 that Intel agreed to pay.
In other words, anyone who buys the stock now will gain a return of 32% within just a few months, if the deal goes ahead as planned. The large gap, however, indicates real fear on the market of the difficulty in obtaining all the approvals required for completing it.
In mid-February this year, Intel and Tower signed an agreement whereby Intel would buy outright ownership of Tower for $53 per share, valuing Tower’s business at $5.4 billion at the time (a total company value of $5.86 billion). In response, Tower’s share price leapt from $33 to $49, approaching the deal price, but since then it has given up more than half the gain.
The acquisition agreement gave the companies a full year in which to complete the deal, that is, until February 2023. Just over two months after the agreement was signed the two companies overcame the first hurdle, as Tower’s shareholders approved it.
Since then, the they have been busy trying to obtain the many regulatory approvals required, because of Tower’s global activity. Tower says that it requires approval from regulators in the US, China, Germany, Israel, Japan, the UK, and Italy.
Worsening US relations with China could stymie approval
Tower Semiconductor is small fry in the semiconductor market, and its sale to Intel will not substantially harm global competition. Regulatory approval in the various countries should therefore not be a problem.
All the same, because of the escalation of the chips war between the US and China in recent months, investors fear that the Chinese regulator is liable to hold up approval. Sergey Vastchenok, a senior equity analyst at Oppenheimer & Co., says that analysts have no way of knowing whether the Chinese regulator will approve the deal or not.
"Regulatory risk is mainly in China," he says. "Will the Chinese approve the deal? That’s not something that analysts can know. It’s impossible to predict."
Vastchenok explains that the people in China might not be keen to give approval, because of the escalation between China and the US. "That’s a serious question, and it’s the sole reason that the stock is behaving this way," he says.
Tower’s share price fell 6% on Nasdaq last week, making it an 11% fall in two months and a 15% fall in the past three months. Vastchenok says that Tower does not have much activity in China, so that, on the face of it, the local regulator has little motive for torpedoing the acquisition deal.
They won’t want a confrontation over Tower"
Vastchenok recalls two other acquisition deals involving Israeli semiconductor companies that were held up waiting for approval from the Chinese regulator but that eventually received approval and were completed. These were the acquisition of Mellanox by Nvidia for $7.36 billion, and the $3.4 billion acquisition of Orbotech by KLA-Tencor.
"I don’t think that the Chinese will want a confrontation with the Americans over Tower particularly," Vastchenok says. "Intel has very close ties with the US administration, and it very much wants this deal, which is one of the best it has ever made.
"So I think that in the end the Chinese will give approval for the deal and it will be closed, as happened with Orbotech and Mellanox. But there’s always regulatory risk, and you can’t get indie the heads of the Chinese.
"Mellanox, for example, was a much more important company to the Chinese than Tower. Mellanox had large sales in China, about a third of its total sales, which were for components for Chinese super-computers. Tower, on the other hand, doesn’t sell much in China. It produces analog chips and sensors, not items critical to the Chinese from a security point of view," Vastchenok points out.
Japan: Opposed to M&A deals
Psagot technology analyst Shahar Carmi said similar things to "Globes" last month. "The worse the bans and hostility between the US and China become, and given that Intel is an outstanding US company, if the Chinese are looking for somewhere where they can hurt the Americans, it’s not unimaginable that they will choose to hold up the deal," he said then. "The Chinese regulator loves delaying deals, but I don’t recall a deal that he torpedoed. The acquisitions of Mellanox by Nvidia and Orbotech by KLA-Tencor were delayed there, but were approved, and in this case I don’t see a threat to competition. So I estimate that it will take a little more time, but the deal will be closed."
Oppenheimer’s Vastenchok stresses that Japan is currently presenting opposition to M&A deals, in order to prevent mass layoffs of workers in their wake. He says that Tower has extensive activity in Japan, and that 33-40% of its revenue comes from its fabs there.
Nevertheless, Vastenchok believes that Intel will be able to obtain approval from the Japanese regulator, since it plans to continue operating the semiconductor fabs in Japan, and not to close them. In this context, he again mentions Intel’s deep ties with the administration in Washington, and its important status in the US industry.
Published by Globes, Israel business news - en.globes.co.il - on November 7, 2022.
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