AMD’s $622M Abu Dhabi deal: Smart deal or delaying fate?

November 19, 2007 – On Friday AMD announced that it will accept a $622M investment from Mubadala Development, a investment group owned by the government of the United Arab Emirates, in exchange for an 8.1% stake in the chipmaker.

Details of the deal are as follows: Mubadala gets 49M newly issued AMD shares @ $12.70 each (the closing price on Nov. 15), but does not gain a board seat with the noncontrolling minority stake. AMD nets about $608M (after reimbursing Mubadala for expenses), to be used for generic “general corporate purposes” including investments in R&D, product development, and manufacturing.

Earlier this year AMD said it wanted to raise nearly $2.0B to pay off existing loans and for capital expenditures amid plans to move more toward an “asset-lite” strategy, and at the time expressed openness to a private investor deal.

The deal is a positive move, improving liquidity and giving AMD more ability to weather a broad-based downturn, notes Doug Freedman, analyst with American Technology Research. “We estimate the company could earn ~$20M in interest income per year on Abu Dhabi’s investment, which helps offset some of the burden of our previous 2008 interest expense projection of ~$232M,” he writes in a research note. The chipmaker is expected to reveal in the coming weeks more details about its fab-lite strategy and its 45nm-node manufacturing details, which promise to reduce cost burdens and improve efficiencies, but Freedman is confident that the company can maintain at least high-40% gross margins, if not high-50s, particularly since it is leveraging chipsets and GPUs.

Moreover, he thinks AMD is seeing “strength in end market demand with mix shift towards notebooks from server markets as Barcelona ramp remains in front of us.”

Not everyone is optimistic, though. The Wall Street Journal notes that AMD’s SEC filings indicate its debts outweigh cash by 3.5:1 ($5.3B vs. $1.5B), with more planned outlays ahead — e.g., >$450M to IBM as part of their technology partnership, $300M in capex in 4Q, plus further payments to Canada related to its ATI acquisition.

The Mubadala deal “pushes the wolf away from the door for a little while,” quipped Standard & Poors analyst Bruce Hyman, cited by the paper.

Mubadala also has holdings elsewhere in the chip industry — in September it paid $1.35B for a 7.5% stake in private equity firm the Carlyle Group, which has participated in buyouts for Freescale, Jazz Semiconductor, AZ Electronics, and Toshiba Ceramics, and took a stake in Japanese chip assembly and test house Nakaya Microdevices Corp. after a failed bid to acquire Taiwan packaging/assembly giant Advanced Semiconductor Engineering.

AMD’s top shareholders*

Investor Shares (M) Stake

Capital Research & Mgmt 87.4 14.4%
Fidelity Research & Mgmt 71.5 11.8%
Mubadala Development 49 8.1%
Oppenheimer Funds 46.5 7.7%
Alliance Bernstein 25.8 4.3%

* Note: Holdings as of June 30, except for Mubadala.
Source: WSJ Markets Data


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