KLA-Tencor reveals ‘leveraged recapitalization’ plan and an expanded stock repurchase program

Yesterday, KLA-Tencor announced a plan to significantly accelerate its strategy to drive stockholder returns. KLA-Tencor’s Board of Directors authorized the financing of a leveraged recapitalization, which would feature a special cash dividend of $16.50 per share, representing approximately 23 percent of the company’s common stock price as of October 22, 2014, or approximately $2.75 billion.

In its official release, KLA-Tencor said its Board of Directors currently intends to declare and pay the special cash dividend before December 31, 2014. The special cash dividend would be in addition to the Company’s regular $0.50 per share quarterly cash dividend. The company’s regular $0.50 per share quarterly cash dividend is expected to be declared and paid following the company’s regularly scheduled Board of Directors meeting in November 2014.

In connection with the leveraged recapitalization, the Board of Directors has approved an increase to the company’s stock repurchase program for up to 3.6 million additional shares of the company’s common stock, which is valued at approximately $250 million based upon the closing price of the company’s common stock as of October 20, 2014. This is in addition to the $1 billion stock repurchase program previously announced in July 2014.

KLA-Tencor expects to complete these share repurchases within 12 to 18 months. The repurchases may occur from time to time, in the open market, with consideration given to the market price of the common stock, the company’s other investment opportunities, and general economic conditions.

Including the intended special cash dividend of $16.50 per share (or an aggregate value of approximately $2.75 billion), the $250 million increase to the stock repurchase program announced today, and the $1 billion stock repurchase program previously announced in July 2014, the total capital that would be directed to stockholders would be approximately $4 billion in aggregate.

The intended special cash dividend of $2.75 billion in the aggregate will be funded in part with a portion of the cash on the company’s balance sheet, and in part with incremental debt. To fund the debt financed portion of the special cash dividend, KLA-Tencor intends to add up to $2.5 billion of incremental debt, consisting of a combination of investment grade senior notes and a pre-payable term loan facility, subject to market conditions. The company also expects to enter into an unfunded revolving credit facility, subject to market conditions. The declaration and payment of the special cash dividend are conditioned on the company’s ability to obtain requisite debt financing on satisfactory terms and conditions. KLA-Tencor intends to manage its capital structure to preserve and maintain its investment grade rating.

What the analysts are saying

Getting a read on what this means for KLA-Tencor’s future is difficult, but Srini Sundararajan, Semiconductor, Semi-cap Equipment Analyst, Summit Research Partners, provided these thoughts.

“Most likely, an increased capital intensity projection due to FinFET and 3D NAND next year likely left the management to seize the opportunity for a one-time special mega-dividend shareholder return during 2014,” said Sundararajan. “KLAC could potentially be an acquisition target for LRCX or ASML given that they might need to ‘bulk-up’ post the potential consummation of an Applied Materials-Tokyo Electron merger.”

While the leveraged recapitalization plan benefits shareholders and upper management, it will definitely lead to higher interest expenses and during down-turns, Sundararajan said, there could be some pressure put on continued dividends and buybacks while paying down the debt.

“The use of debt to return money to shareholders will definitely leave some wondering whether the company thinks that: a) additional internal R&D is a worthy use of money, and, b) no external M&A targets are out there that are attractive,” Sundararajan concluded.


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