What next for Tower Semiconductor?

Russell Ellwanger  credit: Eyal Izhar
Russell Ellwanger credit: Eyal Izhar

Cancellation of the merger with Intel leaves Tower still well positioned in its market, and an attractive target for other bidders, analysts who cover the company say.

A wait of a year and a half has gone by since Intel announced that it would by Israeli chipmaker Tower Semiconductor (TASE: TSEM; Nasdaq: TSEM) for the astronomical sum of $5.4 billion. Now, the two companies have announced the cancellation of the deal. Completion, which was supposed to have taken place by February 2023, was postponed to August 15. Since the required regulatory approval was not obtained by the new deadline, the deal was cancelled, and Intel will pay Tower a penalty of $353 million (6.5% of the value of the deal).

Had it materialized, the sale of Tower Semiconductor would have been the fourth largest ever of an Israeli company. In 2017, Mobileye took top place when it was bought by Intel for $13.5 billion, while second and third go to Frutarom and Mellanox, bought by US companies in 2018 and 2020, for $7 billion each.

"The company will still be attractive"

Cancellation of the deal was widely expected, and was priced into Tower’s stock. The day before the announcement, Tower shares traded at $33.8, more than a third below the acquisition price of $53.

Sergey Vastchenok, senior equity analyst at Oppenheimer & Co., who has followed Tower closely for years, says, "There were rumors on the market that the deal would not be completed in the end. When there is such a large price gap, it’s pretty clear that investors think that the deal won’t happen."

After the announcement of the cancellation, Tower’s share price fell by more than 10% in Tel Aviv, on a huge turnover of some NIS 100 million, 3.5 times the average daily figure, but the price recovered somewhat towards the close, and the share price ended the day down 7.79%. The company’s current market cap on Nasdaq is $3.44 billion

"The negative cycle in the semiconductor industry did not pass Tower by, and its results in recent quarters took a hit," says Rudi Shtivi, head of the overseas equities department at IBI Investment House. "Since the announcement of the acquisition, Tower has been parsimonious with information to investors. It did not conduct talks with them, and published meager information that made it hard to understand its current business situation."

Still, there are those who are optimistic about the future of the company from Migdal Ha’emek. Tower posted EBITDA of $590 million last year, giving a multiple of six on its current valuation, with the addition of the payment from Intel. "It would therefore be hard to say that the company is overpriced," says Shtivi. "All in all, the company is in a excellent position business-wise, in a great industry. The fear is that the negative cycle will lead to further deterioration in its results."

Oppenheimer’s Vastchenok too believes that, as an investment, Tower could be interesting in its own right. "The share price has gone back to what it was before Intel’s offer, but in the meanwhile the semiconductor market has undergone a significant rise in the levels of multiples at which the companies are traded," he says. "Tower looks really attractive as a company in itself, so that bids to acquire it may come along from other companies."

Vastchenok says that Tower specializes in the technological aspect, and operates in a market that has undergone consolidation, in which there are three to four big companies and several small ones. "The company could be attractive to manufacturers, for example from Europe," he adds. "If a new offer comes along, from a company such as STMicroelectronics or Infineon, I wouldn’t rule them out. There is now a genuine opportunity for new investment for companies like these in buying Tower. With the share price falling following the official announcement of the cancellation of the deal, it could be interesting for investors."

Where does Tower go from here?

Tower specializes in analog chips, fairly simple chips used as electronic sensors in a variety of installations, such as vehicles, medical imaging devices, and cameras. Intel was to have acquired it in order to expand its production capacity and extend its foothold in a new portfolio of products.

"There has been no investment in Tower’s field for years," says Vastchenok. "No new foundries have been built. They are starting to make steps in that direction today under an American law that encourages it, but it’s far from enough."

After Intel pays the penalty for cancelling the deal, Tower will have more than $1.25 billion cash. The assessment is that the Israeli company will use the money to expand its production capacity. In recent years, it has examined various possibilities for acquisitions or commercial agreements to that end. At present, it has six production facilities, two of which are in Israel, in Migdal Ha’emek.

Will CEO Russell Ellwanger step down?

Can we now expect changes in Tower’s management? After the cancellation announcement, Tower CEO Russell Ellwanger said, "Tower was very excited to join Intel to enable Pat Gelsinger’s vision for Intel’s foundry business. We appreciate the efforts by all parties. During the past eighteen months, we’ve made significant technological, operational, and business advancements. We are well positioned to continue to drive our strategic priorities and short-, mid- and long-term tactics with a continued focus on top and bottom-line growth."

Despite this, there is a belief in the market that Ellwanger will shortly step down. "Even before the acquisition, the feeling among many people was that the Tower CEO was a bit worn down," says Shtivi of IBI. "In our view, there is a high chance that in the coming year he will announce that he is leaving."

Ellwanger, Tower’s American CEO, has headed the company since 2005. He joined it when it was in difficulties, and when there was doubt about its ability to pay its $500 million debt to the banks. During his term, he has turned the company around: it made an agreement with the banks and repaid the debt, started to grow, switched to profit, and carried out acquisitions.

The State of Israel is paying a price too

The cancellation of the Intel-Tower merger will cost the state a considerable loss of tax revenue. Last year, the amount that the Israel Tax Authority would collect was estimated at about NIS 1 billion.

Tower is an Israeli company, but most of its shareholders are overseas residents and exempt from tax in Israel. Had the deal gone ahead as planned, the Israeli shareholders would have been liable to tax of 25% on their capital gains. The main Israeli shareholders in Tower are insurance companies Clal Insurance (6.05%) and The Phoenix Holdings (3.12%), and investment house Meitav (1.43%).

Published by Globes, Israel business news - en.globes.co.il - on August 17, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Russell Ellwanger  credit: Eyal Izhar
Russell Ellwanger credit: Eyal Izhar
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