Magnachip Semiconductors (MX) – Merger Arbitrage – 19% Upside

Current Price: $24.45

Offer Price: $29.00

Upside: 19%

Expected Closing: H2 2021

Proxy

This idea was shared by Alan.

 

This is one of the most interesting merger arbitrage situations currently on the market, offering substantial short-term upside and downside protected by fundamentals.

On the 26th of March, the second-largest display chip (semiconductor) producer in the world, Magnachip Semiconductors announced a takeover by Chinese PE firm Wise Road Capital at $29/share in cash. The transaction is subject to approval by the majority of MX shareholders and several regulatory consents – China, South Korea and the U.S. Closing is expected in H2 2021. Shareholder meeting date hasn’t been announced yet.

Shareholder approval shouldn’t be an issue. The offer is priced at 15.5x TTM adj.EBITDA and at an all-time high share price. Management owns 3.6%. 5 major shareholders (mostly large asset managers) have a combined stake of around 27%. In two months since the announcement, none of them have opposed the transaction, and, in fact, all of them have recently slightly trimmed their stakes below the offer price. Given these facts shareholders are unlikely to oppose the takeover at $29/share.

The biggest issue and the reason for the spread is the regulatory hurdle and more specifically – the approval by Korean foreign investment regulator. MX keeps most of its operations, IP and cash in South Korea. The Korean government is currently in the process of deciding whether OLED chip technology (including MX’s IP) should be considered as a core national technology. The verdict is expected to be made by the end of this month. A decision that the MX IP is strategically critical would allow the regulators to put a probe on the takeover and in turn, this would significantly increase the chances of the transaction getting blocked. I am examining the Korean regulatory aspect in more detail below. And while this adds significant risk to the situation, the chances of consent still seem quite decent and definitely tolerable given the wide spread. Approvals from the U.S. and China regulators should not be an issue.

Importantly, at the current prices, the downside seems to be fully protected. MX has recently sold its foundry business and transitioned closer to a pure-play chip design company (the company retained a small foundry for its own products and transitional services). Going forward, the company expects significantly improved top-line growth and margins. The effects are already somewhat visible in the performance over the last two quarters. MX has around $10.30/share in cash (inc. break fee) and no debt. Excluding cash, the operating business now trades at 9.7x normalized TTM adj. EBITDA (vs peer multiple of 13.5x EV/TTM adj. EBITDA). So in the worst case, even if the merger breaks, the share price drop should be limited. Pre-announcement price stands at $20.41/share, but might no longer be applicable due to positive Q1’21 results announced recently.

MX sale process was highly competitive with bids from multiple interested parties including a few strategic buyers. The offered prices were above current levels. The second and third highest bids were $26.50/share and a range of $25-$29/share. One strategic buyer came late into the process and had no time to make an offer at all.

 

Magnachip

The company designs and supplies analog and mixed-signal semiconductors. Until recently it also provided foundry (i.e. chip manufacturing) services for third-party semiconductor companies (used to be c. 40% of revenues). Foundry business was capital intensive and lower margin – it was sold together with the manufacturing facility (Fab 4) in Sep’20 for $350m. With that, MX transitioned closer to a pure-play chip designer/supplier and part of the proceeds were used to eliminate debt. At the time, management commented:

We will run lean and mean. As a streamlined standard product company, we will rightsize OpEx and exercise financial discipline. Operating income targeted to double from current levels. Our longer term goal is for adjusted operating income, which excludes stock-based comp to double to above 10% in the next few years. […] Adjusted EBITDA margin percentage to increase. This goal will be made more achievable without the foundry business and Fab 4.

According to the sale agreement, MX will continue to provide transitional foundry services to the buyer for up to five years.

Current segments are standard products and transitional third-party foundry services:

Standard products (92% rev):

  • Display solutions – comprises of display solutions and power solutions divisions. Display solutions provides products to major suppliers of mobiles, automotives, notebook PCs, LCDs, OLEDs, micro-LEDs, etc. MX is the largest OLED panel chip producer, after Samsung Electronics. OLED division generates around 17% of total revenues and is a high growth industry with positive tailwinds from 5G smarthphones sector.
  • Power solutions – offers power management products and services. Products include metal exide semiconductor field effect transistors (MOSFETs), gate bipolar transistors (IGBTs), AC-DC converters, DC-DC converters, LED drivers etc.

Transitional Fab 3 services (8% rev) – uses the remaining MX’s manufacturing facility (Fab 3) to perform foundry services to the buyer of foundry services business/Fab 4.

Most of Magnachip’s operations, the design center, all of the IP and inventory are located in South Korea. 97% of cash is also held by the Korean subsidiary. The remaining Fab 3 foundry facility (used for 8-inch wafer manufacturing, 3x smaller than the one that was sold last year) is also located in Korea. OLED product manufacturing is outsourced to external 12-inch foundries. Assembly, test and packaging operations are also outsourced mostly to China.

56% of standard product sales are generated by the two largest customers – Samsung and LG, which are both South Korean companies. However, from the geographical standpoint, a majority of the company’s revenue is generated in China:

  • Asia Pacific 75% (China is 61% of total)
  • Korea – 22.9%
  • Europe – 4.3%
  • United States – 1.1%
  • Others – 0.4%

 

Regulatory conditions

The takeover requires consent from the Chinese antitrust watchdog and also regulatory approvals from the U.S. and South Korea. The merger background part of the proxy details that MX put very high importance to the regulatory concents and potential break-fee provision related to that. The negotiations with all bidders were led around it.  Merger agreement included high break fees (usually these are around 3%) if the transaction is blocked by regulators – the very fact that the buyer has agreed to such high termination fees clearly indicates that it expected the deal to be approved eventually.

  • U.S. – $70m or 5% of total consideration;
  • South Korea – $84.3m or 6%;
  • China – $105.3m or 7.5%.

Given that the company has no assets in the U.S. and generates only 1% of revenues in the states, no regulatory hurdles were/are expected there. The buyer is a Chinese PE firm, so a block from China is also unlikely.

MX management seemed confident about the South Korean approval as well, mainly due to buyer’s intentions to keep the MX technology, IP and remaining manufacturing operations in the country. MX management will also remain unchanged after the takeover – Wise Road was/is positioned as a purely financial buyer. From proxy:

Our Board considered that, although there is an antitrust filing that will be required to be made in the PRC, there are not likely to be significant antitrust or other regulatory impediments to closing, including none expected in the United States or in the Republic of Korea. <…> With respect to Korean regulatory approvals, our Board considered (1) the fact that no assets of MSK, including the technologies and the intellectual property rights as well as the manufacturing equipment and facilities held by MSK, will be transferred out of South Korea in connection with or as a result of the transaction, (2) the understanding that Parent does not intend to transfer any assets, including to the extent that MSK currently possesses or in the future may possess any National Core Technology (as defined in Article 2(2) of the Act on Prevention of Divulgence and Protection of Industrial Technology of Korea, as amended), outside of South Korea after the transaction closes, and (3) the understanding that the Company and Parent are committed to taking all necessary measures to continue to comply with the laws and regulations governing National Core Technology in connection with, as well as after, the transaction.

Despite assurances from management, the approval by South Korean authorities remains a major risk. Apparently, the country’s government fears that this transaction might result in a similar outcome as did the takeover of Hydis, an LCD company that was sold to a Chinese buyer in 2002. Hydis had its IP stolen and later on sold to Taiwanese companies. BOE, in turn, became the largest LCD company in the world.

Recent events on the regulatory front as highlighted by a few Korean media articles:

  • March 30 – Korean government requested data to determine if MX has the “national core technology”. If it is decided that MX technology is critical, the government will review the takeover in detail and could potentially block it due to national security reasons.
  • May 12 – government initiated a procedure to decide if OLED chip technology is a national core technology. It was reported that the Minisitry of Trade, Industry and Energy “recently held a display expert committee and decided to propose an agenda to designate OLED driving chip-related technology as a national core technology”. Spread widened from 20% to 30% upon this news, but has narrowed down again recently.
  • May 17 – it was reported that the government should reach a decision by the end of this month.
  • May 18 – another report came out stating that the government is “unlikely to intervene with the merger”.

At the moment it’s quite difficult to handicap what decision will be made, however, it is important to note that even if the OLED gets designated as a critical technology, it doesn’t automatically mean that the deal will get blocked (although the chances of that happening would become substantially higher).

Unlike OLED, LCD technology is already considered as critical in South Korea. Despite this status, the government approved Samsung’s LCD plant sale to Chinese buyer at $1.1bn a few months ago. LCD is a less valuable (i.e. old) technology and the mentioned plant is located in China, not Korea.

Magnachip is putting significant efforts into convincing regulators to approve the merger. Recently (May 20th) the company released a PR that outlines company’s intentions to significantly increase its investment in South Korea which will mostly be financed by the buyer. The announcement reads like a purely promotional move to appease regulators. Apparently, the company intends to invest nearly $2bn in its Korean R&D centers, manufacturing, workforce etc. and even mentioned that the consideration for the takeover will be paid by offshore (non-Chinese) funds. A few quotes:

We will support everything we can, to assist Magnachip in strengthening manufacturing and R&D capabilities in Korea, pursuant to this announcement on future growth goals and the investment plan. We expect to retain the existing management and we guarantee that employees, factory and IPs will stay in Korea, and the Company will continue to acquire the best talents and reinforce manufacturing and R&D capabilities in Korea, while also contributing to Korean regional economic development and vitalization.

As mentioned in Magnachip’s proxy statement filed with the U.S. Securities and Exchange Commission, Wise Road Capital expects the share transaction involving the U.S. parent company, Magnachip Semiconductor Corporation, to be funded by offshore funds outside of China.

We consider this announcement to be a positive factor to the labor union’s continued demand and priority for employment stability, improvement in treatment, retention of manufacturing facilities and increased investment, and vitalization of Gumi regional economy.

After completing investment processes, Wise Road Capital has supported its portfolio companies in expanding manufacturing facilities and increasing investments in R&D. Particularly, Wise Road Capital has, as a matter of principle, played the role of a pure financial investor and supported its portfolio companies to become global companies, by enabling their pre-existing headquarters, manufacturing facilities, R&D centers and other facilities to continue to operate, retaining the existing management team and employees, and avoiding intervening with ordinary business operations.

Reportedly, some analysts think the deal is unlikely to get blocked as MX’s OLED technology is not considered to be an advanced high-tech. This was apparently, confirmed by LG, which previously reviewed a possibility of acquiring MX: “LG Group considered that it did not possess advanced technology even after reviewing the acquisition of Magnachip”.

 

Valuation

Historical financials:

Peer comparison is quite tricky here as MX doesn’t have any direct competitors. The company is not entirely fabless (without foundry), which impacts its margins – the latest gross margins were 28% and adj. operating margins – 8%, whereas most fabless semiconductor companies operate at around 50% gross margins and close to 20% operating margins. Nonetheless, now that the company has sold its capital-intensive foundry services business, management expects to significantly increase operational efficiency in the upcoming years. The most recent investor presentation includes a 2020-2023 Plan to reach double digit revenue CAGR, above 30% gross margins and reduce operating expenses by 40%. In comparison, the company also expects OLED market to grow 12.7% from 2020 to 2023 and power semiconductor market by 4.3%.

A somewhat similar peer could be OSIS – it produces semiconductor products for security systems and healthcare monitoring and has its own manufacturing facility (not fabless). OSIS has $1.7bn market cap, $2bn EV and operates with 37% gross and 12% adj. operating margins. OSIS currently trades at 13.5x TTM adjusted EBITDA vs 15.5x offer price for MX.

In the deal breaks, downside seems to be well protected. MX currently trades at 11.5x adj. TTM EBITDA (including break fee cash). However, the company is still in the process of transition into a pure-play standard products business.  Assuming the company manages to reach 10% adj. operating margins (shouldn’t be difficult given that Q4 was at 11% and Q1’21 at 8%) and keeping revenues at current levels, MX trades 9.7x forward EBITDA.

 

Other buyers

The company had multiple potential suitors:

  • Party A – strategic, likely a company from the U.S. as negotiations mostly turned around the break fee from U.S. regulatory condition. The latest price offered was $26.50/share. Negotiations have lasted for over 1 year, so it seems that the buyer was really interested in MX.
  • Party B – offered $21.50/share and later turned to bid for the power supply business only.
  • Party C – offered $24.04/share.
  • Party D – stated that it won’t have any problems with Chinese regulatory approvals and even agreed to an 8% termination fee. The latest price offered was $23.50/share.
  • Party F – offered a range of $25-$29/share.
  • Party G – a strategic buyer, joined the process a week before MX signed the merger agreement, had no time to put in the bid.

 

Wise Road Capital

Wise Road is a Chinese PE firm focused on investments in semiconductors and other high-tech industries. The company has recently made two similar acquisitions:

  • August’20 – UTAC – provider of assembly and test services for a broad range of semiconductor chips.
  • November’18 – Nexperia ($3.6bn) – semiconductor manufacturer.

66 COMMENTS

  1. ijw

    Im curious what the strategy is if a merger like this breaks. You sell as soon as possible? There will probably be a lot of selling pressure right after if this breaks. So you hold for another 6 months and then sell?

    1. jwestern

      Maybe buy in half of what you’re comfortable with, and reserve the other half to pick up cheaper shares in the event of post-break selling pressure. That would shorten the wait until price recovery to your cost basis.

    2. fishwithwings

      I’m not to fimiliar with Chinese PE firms.
      Is there any capital control risk in the trade?

  2. Michael Lax

    I see it is down about 5% today in an up market, any specific reasons for that?

    1. crandyhill

      Probably be down again Monday, though I don’t see a big issues.

      “On May 26, 2021, outside legal counsel of each of the Company and Parent received an e-mail from the U.S. Department of Treasury on behalf of the Staff Chairperson of the Committee on Foreign Investment in the United States (“CFIUS”). In the e-mail, the CFIUS Staff Chairperson, acting on the recommendation of CFIUS, requested that the parties file a notice concerning the Merger and thereby undergo formal CFIUS review of the Merger.
      While the Company continues to believe that there should not be any approvals required for the Merger in the United States, it will cooperate with CFIUS by filing a joint voluntary notice with CFIUS under the Defense Production Act of 1950, as amended, and responding to any further questions from CFIUS regarding the Merger. As previously noted, the Company is a holding company. All manufacturing and research and development activities take place in South Korea, and substantially all sales activities take place in South Korea, with the remainder of sales operations located in China, Hong Kong, Taiwan, Japan and Germany. Substantially all of the employees are based in South Korea and employed by Magnachip Semiconductor, Ltd., the Korean operating company (“MSK”); and the remainder of the employees are located outside the United States. There are no tangible assets or IT systems located in the United States, and all intellectual property is owned by MSK or, to a very limited degree, other non-U.S. subsidiaries of the Company.
      Under the terms of the Merger Agreement, the parties’ receipt of the request from CFIUS to file a notice concerning the Merger results in the closing of the Merger now being conditioned on the receipt of CFIUS approval without the imposition of a burdensome condition as defined in the Merger Agreement.”

  3. ijw

    I thought this Seeking Alpha comment rather nicely sums up why this is not likely to be blocked:

    “I would be very surprised if the koreans block this. Korean semiconductor companies have a lot of exposure to china counter measures. Samsung, SK Hynix and LG have investments in China worth tens of Billions of dollars. SK Hynix just recently bought Intels nand business which is entirely based in China for 9 billion. If China decides the Koreans are being unreasonable they can easily put on the hurt.
    I doubt the Koreans will risk tens of billions of dollars of investments of their national champions for a mere one billion dollar deal for what is considered a second tier company. If they really want to keep Magnachip the Korean government will simply ask one of their semi giants to simply make a better offer.
    But naturally the ministry of trade will have an investigation, they want to protect their beurocratic turf.”

    1. snowball

      London-based Cornucopia seems to be more of an advisory shop than a traditional PE firm, and it’s making the bid on behalf of a client consortium.

      Some of the investors in the consortium are China-linked, similar to Wise Road, and thus this new bid shares the same China risk.

      “Cornucopia Capital is a private investment firm founded by Robin Choudhury in 1999 and is focused on deal origination, complex corporate finance advisory, financing and investment in the technology, property, consumer-facing, and leisure sectors.”

      “The proposal also represented investors, including financial sponsors led by Tim Crown, Yango financial holdings, Sino-Rock Investment Management Company Limited, and Lombarda China Fund.”

      3
  4. ijw

    Now there is a rumor that others (who are not Chinese) are interested as well if deal with Chinese breaks :

    https://ctfn.news/news/jun-18-2021-mx-458234/

    Seems like Western governments will have a harder time pressuring their firms to overpay for something like this.

    What will the time line be? 6 months? Seems like downside is pretty well capped here now though.

  5. ka_yoyo

    Are there any updates on this? Seems like MX price keeps dropping in the absence of any new news/updates.

    1. Alan Alan

      The only updates issued by the company are:

      – MX board received letter from Cornucopia noting that “in light of recent U.S. regulatory developments since their submission of the Proposal, they will have to modify their financing plan. The Company has not received any further communications from Cornucopia since their letter dated June 17, 2021.”
      https://www.sec.gov/ix?doc=/Archives/edgar/data/1325702/000119312521211912/d188127d8k.htm

      – Merger was cleared by China antitrust regulators.
      https://www.sec.gov/ix?doc=/Archives/edgar/data/1325702/000119312521205495/d185936d8k.htm

      1
  6. ijw

    My main concern is that this could also be blocked by Chinese regulators in case a US or Korean buyer steps in. Anyone has any thoughts on that?

  7. Tan

    MX has fallen to pre deal announcement price. The stock has lagged behind the semi conductor index during this period. Even if there’s no deal, seems overdone perhaps?

    1. crandyhill

      Announced a bad quarter, blamed it on supply issues. Possibly some are concerned deal might get pulled or just FUD around CFIUS approval.

    2. crandyhill

      On their conference call they blamed their miss on global shortage of “AMOLED display drive integrated circuits”.

      And this. Seems as if you aren’t disclosing design wins, you did it for a reason. Now why are you disclosing presumably a Samsung win? “We discontinued publicly disclosing OLED DDIC design-win numbers, but we can highlight a key design-win that we secured in Q2. Following last year’s successful debut, we were qualified again with a major Korean smartphone OEM for their new key model expected to launch in the second half of this year.”

      Lastly. “Are the three-year targets (2020-2023) that you announced last year still valid? We remain committed to the previously announced 2020-2023 key goals”.

      Sounds like they still really want to close the deal.

  8. crandyhill

    Wonder if they could just dump their US listing to end this charade with the CFUIS?

    1
  9. Zulu Investor

    Does anyone wanna chime in on the US finding national security risks to Magnachip? I don’t have much insights to it and would like to here any insights. Any other cases where a government finds national security risk to something and the merger still gets approved?

    1
    1. Lukas

      Difficult to say, but it seems more likely than not that this deal will get busted. Any other potential/previous buyers will not touch it with a ten-foot pole as it has become clear now that the regulatory wall is too much. MX will receive $2+/share in break-fee and at these price levels, the downside seems protected, however, not sure to what extent the busted-merger-overhang and killed prospects of ever getting acquired will impact the stock. Further performance will depend on management’s actions and what will they do with this cash (more than half of the market cap). Regarding other cases, I think the MX situation is quite unique and it’s impossible to draw comparisons here.

      Of course, I may be wrong, and Biden will let this pass, however, the Korea risk will be an even bigger hurdle then.

      4
  10. Ilja

    MX asked CFIUS to withdraw and refile the merger notice to permit further discussion concerning potential options for mitigating the risks. The request was granted and the new review started on the 14th of Sep. It will last until the 28th of Oct with potential another 45 days extension. So apparently MX believes that there is still a chance to solve this.

    https://www.bamsec.com/filing/119312521271932?cik=1325702

    2
  11. dt

    Magnachip released Q3’21 results, which showed material improvement in revenues and EBITDA QoQ as well as YoY. Most of the gains seem to be from the favourable pricing environment allowing the company yet again to report record gross margins of 37% vs more normalized 25%. The news was positively received by the market.

    No additional color was provided regarding the pending regulatory approvals. MX remains cheap, especially at current earning levels (by my quick count trades at less than 5x run-rate EBITDA).

    1. Lukas

      Allegedly somebody is buying a ton of $25 and $30 strikes for December and January call options. Either someone is gambling or has some inside info re the CFIUS investigation.

      Don’t see any news or reports. Q3 results seem good, though.

      1. snowball

        Or someone who spent $0.5-1.0 /share on call option premiums to get the market excited, and realized a profit of $1.5 /share on his/her much larger long MX position.

      2. rc99ar

        ‘Alleged’ by whom? Wouldn’t that show up? I see 5000 January $30 strike traded at 11:52 yesterday on ISE for .15 and half of it (250k shares) was covered almost immediately. Didn’t move the needle much as this stock is very liquid. If it’s a gamble the deal goes through at $35 in January they’re getting approx 33:1. Seems like normal market function to me. Stonks go up, stonks go down.

  12. ijw

    I thought this Twitter thread was very informative on MX business, and on other potential buyer:

    https://twitter.com/hareng_rouge/status/1345661287947231232

    Seems like SYNA would be a serious potential buyer, and thinks dynamics in DDIC controller market (that MX is in) has changed for the better. Maybe they are waiting for this to fall apart and MX to get break fee, and then swoop in and bid somewhere between $25-30?

    I got back in today at $19.6.

  13. Ilja

    The merger arbitrage idea has obviously failed. On the other hand, MX will now receive $70m of break-fee and will sit on $7.25+/share in cash. This puts the current market price of the operating business below $10/share, which is extremely cheap – 6.6x TTM adj. EBITDA and 8.9x TTM adj. PE. Keep in mind, the company had a rough year with supply chain issues pressuring its display segment. 2022-2023 growth plan guides double-digit revenue CAGR and FCF margin of 8%+. So MX trades somewhere around 6x forward EBITDA and 11x forward FCF. This is cheap given the 20%-25% growth of its display segment and OLED business in the constrained market environment.

    Management thinks so as well and has hinted at an upcoming capital return program:

    Magnachip’s Board of Directors (the “Board”) is actively engaged in determining the best way to return and enhance value to shareholders.

    More details will be unveiled in the shareholder’s meeting on the 6th of Jan. Given their cash resources, they could easily return 20-30% of the market cap at around $22/share+. Management had already been planning capital return before the merger (back in Nov’20), which obviously got canceled due to the takeover interest (from Q3 conf.call):

    Our board is committed to maximizing shareholder value and is evaluating various options including a holistic review of our capital allocation strategy, our target liquidity position and our ongoing distribution framework. We recognize that the company may currently have excess liquidity. We plan to address, among other things, a comprehensive plan for our near term capital allocation, our liquidity, leverage policy and our ongoing shareholder distribution on or before the upcoming analyst day.

    Keep in mind shares were trading at $20-$24/share just before the merger announcement on the 26th of March. The company had a rougher than an expected year due to supply issues, but still generated solid earnings. The recent Q3 results were strong with record-high gross margins at 37% and adj. EBITDA at $26.4m. Overall, the current $17/share price (will likely be lower today) looks inappropriate.

    I am not sure what to think of this poison pill and why was it necessary. Further bids don’t look very likely given the regulatory hurdle.

    The Rights Plan is designed to enable all shareholders to realize the long-term value of their investment in the Company and has been adopted to protect all shareholders from opportunistic efforts to obtain control of the Company, without appropriately compensating the Company’s shareholders, following termination of the Merger while the Board evaluates go-forward options for the Company.

    .

    Do you have any thoughts on this Alan?

    3
  14. ijw

    Looking at the core business, gross margins have steadily expanded from 15% in 2014, to now over 30% going forward. With double digit revenue growth and $1.5-2 of EPS expected in 2023. So holding on to this is not a bad idea, I hope they will announce a buyback soon.

    Skeptical that an American buyer will be able to buy this though. They will run into the same problem as Wise Road but with the Chinese regulator. It probably has to be a Korean buyer?

    Or they could just stop selling to US, as US is only a tiny portion of their business, and sell to Cornucopia for ~$35? But something tells me that US regulator stepping in was a diplomatic move, so that Koreans didn’t have to.

    1
    1. Ilja

      MX now is not the same company compared to 2014. It sold the foundry business last year (for more than was expected initially), repaid the debt and what remains is now relatively asset light business with rapidly growing OLED division.

      1
      1. ijw

        Yeah sorry, I meant the standard products segment had 13.6% gross profit margin in 2013 actually. Not 2014. So gross margins more than doubled in just under a decade. And it does not seem to be a temporary thing caused by Covid. As they had risen already to 27% in 2018. So there seems to be a long term upwards trend here. And operating leverage on top of operating expenses as well.

        1
  15. Ilja

    A few highlights from the most recent MX updates from Matt/Majic (private investor/VIC member):

    – Before the recent merger break announcement, he estimated the chance of CFIUS letting the transaction pass at 1%. So no surprises here.
    – It is strange that management will update us only on the 6th of January. They had a lot of time to prepare for this. Maybe they are waiting for Q4 numbers. The date is also weird (Epiphany) in the US.
    – Dilution risk from the recent poison pill is irrelevant. In the history of poison pills it has never happened (the dilution) and the whole point of the poison pill is for it to never happen.
    – The PR said management is considering MX leverage policy. Majic sees that as positive and, given that the company is debt-free, that note could signal that MX will be able to return a large amount of current cash. Wise Road would’ve likely put 3-4x turns on debt after the acquisition.
    – He expects at least 15% capital return at $20-$23/share. If it is a tender offer, he will not tender at such prices.
    – Potential buyers can now only be Koreans. Majic doesn’t think that a new bidder will appear sooner than 6 months.
    – The main risks are – potential issues with Samsung (largest client), which previously was rumored to be unhappy about the potential MX sale to the Chinese firm and considered scaling down some of the business with MX. Now that the sale is off the table, the risk is probably gone. Two ways to lose in short term now are either if the capital return won’t be aggressive (small) or the forward guidance will be disappointing. Given that management has reiterated the 2022-2023 growth plan, it’s likely that guidance won’t be bad.
    – Estimates fair value around $30/share. Ex. cash, the operating business should trade at 20x PE.
    – Apparently in 2015 CFIUS also blocked some kind of a semiconductor deal that had a Chinese buyer. The stock went up 10x after 5 years.

    Full update:
    https://www.youtube.com/watch?v=MvjUTpxPPFI&t=1771s

    3
  16. nindobe

    No one referenced this yet so I’ll post this from last week 12/22 from Dow Jones

    Magnachip Semiconductor Corp.’s shares were bolstered Wednesday by the semiconductor-platform solutions company’s plans to buy back up to $75 million of its shares.

    In morning trading, the stock was 6.5% higher at $20.07, for a gain of 48% since the end of last year.

    Magnachip late Tuesday said it board authorized the repurchase program and had entered an agreement with JPMorgan Chase Bank to repurchase $37.5 million worth of shares. The company will receive an initial delivery of about 1 million shares.

    The buyback program reflects the company’s financial strength, long-term growth strategy and ability to generate sustainable cash flows, Magnachip Chief Executive YJ Kim said.

  17. ijw

    I listened to the call, nothing about other offers, but maybe I was naive to expect them to talk about that.

    Interestingly on the business side, they are very supply constrained due to fab shortage. 2021 demand is 50% higher than actual revenue. So if you can wait till 2023 and 2024, earnings might explode upwards then. Would think that this would motivate another buyer to make an offer before that happens?

    2
  18. Ilja

    MX reported Q4 and full-year earnings. No further updates on mid-Jan rumors that MX is preparing to restart the sale process after several expressions of interest from the previous bidders. However, the downside seems to be well protected while we wait – this is a cheap growing business in the industry with secular tailwinds that is expected to start growing rapidly by the end of 2022 when the additional capacity comes online and supply issues normalize.

    Updated performance table:

    In Q4’21 MX business is still heavily impacted by the supply issues, however, the margins continued to stay elevated (increased pricing and utilization rate). Q1 guidance estimates $108m-$110m revenues and 35%-37% gross margins, so profitability should be similar to Q4. Supply issues are expected to stay for the foreseeable future, but later on this year the revenue line should have some support from additional manufacturing capacity to be added in H2 2022 and a recently signed new non-Korean client. So far management conservatively expects 2022 revenue to be slightly above 2021.

    MX now trades at 8.7x 2021 EBITDA. The company also had $280m of cash (vs $870 market cap) by the end of Q4 and is willing to maintain $100m+ cash on the balance sheet. Even with the intended further investments into capacity increase, MX should still have a substantial amount of excess cash left on top of cash to be generated in the upcoming quarters.

    3
    1. nuggy5

      <7x EBITDA today looks pretty interesting for the space. I will admit I'm not super knowledgeable about the industry or the company.

      1
  19. Ilja

    MX completed its previously announced repurchase of $37.5 million of common stock in line with its accelerated stock repurchase agreement with JPMorgan. Magnachip repurchased approximately two million shares at an average price of $18.51.

    $37.5 million remains authorized under the plan to repurchase $75 million of the company’s common stock. The stock is at $15.27/share now. I guess the second half of authorization will be done much faster.

    https://investors.magnachip.com/news-releases/news-release-details/magnachip-completes-375-million-accelerated-stock-repurchase

  20. Ilja

    $18/share is less than 7x 2021 adj. EBITDA and seems way too low here. Management said there are several interested parties, so hopefully, negotiations will ultimately lead to price increases.

    Shareholders are apparently getting cornered as the recently failed merger deal greatly reduced the potential bidder pool due to regulatory concerns. But in this case, no deal might be better than a lowball offer like that.

    1. mosbaek

      Agree. Some is speculating that the 1trn is EV (ex-cash) – in that case we are around 24ish, but pretty much speculation at this point. We will probably know more next week. Considering that they just turned down another offer it’s unlikely that they’ll let it go at 18-19….But KRW is 10 pct. weaker and South Korean stocks are down 25 pct. since the 29 offer. SOXX more or less unchanged.

      3
    1. mosbaek

      I really like R/R, but there’s no floor. They have turned down other bidders due to price. Definitely a risk that there will be no deal.

      Maybe we will know more tomorrow where they report Q1.

      2
  21. Ilja

    Q1 earnings showed a weaker top line – supply chain issues exacerbated by lockdowns in China continue to weigh down on the company’s performance. Margins remained strong, although the company guided for a slight gross margin decrease in Q2. The company reiterated confidence in the long term growth citing recent design tractions with an existing OLED customer (potentially Samsung), broadening customer base as well as new wafer capacity coming later this year. Nothing was mentioned about the sale process.

    1
  22. mosbaek

    LX still interested according to this article (google translate). So is SK Hynex. Question seems to be if they are willing to pay the asking price…

    https://news.g-enews.com/article/Industry/2022/05/202205031551126748a67d2c7d5a_1?md=20220503163035_S

    “In recent years, in a situation where the ransom of semiconductor companies has risen due to the boom caused by the supply chain disruption, MagnaChip Semiconductor also set the sale price higher than the expectations of prospective takeovers. Accordingly, Kolon, which had considered participating in the acquisition, gave up, and it is known that SK Hynix is ​​adjusting the price through behind-the-scenes work.

    In this situation, interest in MagnaChip Semiconductor is growing due to the participation of LX Group. In particular, when deciding to participate, we cannot rule out the possibility of coming up with a groundbreaking takeover proposal that exceeds the expectations of competitors due to the nature of Chairman Koo, who emphasizes ‘strong LG’ and boasts a strong driving force.

    If Chairman Koo takes MagnaChip Semiconductor, he will be able to fill in some of the regrettable past. Along with this, LX is expected to establish itself as another axis leading the domestic semiconductor industry along with Samsung Electronics, SK Hynix, and DB Hitech.”

  23. Alan Alan

    MX is down 24% in June on no specific news from the company. The drop is in line with a 19% decline of Korean Semiconductor Index (KRX) driven by semiconductor inventory build-up and reduced supplier deliveries.

    Interestingly, a tweet from Flake highlights that LX may have waited for separation from LG before bidding for MX. Yesterday, LX breakup from LG Group was officially approved by the Korean antitrust authority. LX appears confident about expanding the business – some quotes from yesterday’s article:

    “An LX Group official said, “LX Pantos Logistics and LX Semicon plan to reduce the trading volume with LG group companies by expanding the scale of external customers, expanding overseas market sales, and entering new businesses.

    In this regard, Koo Bon-joon, chairman of LX Group, also announced plans to acquire MagnaChip through LX Semicon and develop it into a comprehensive semiconductor company. LX Semicon is a fabless company that designs semiconductors and continues the business of DDI chips used to drive pixels of LCD and PDP panels.

    As MagnaChip is also developing the same business, some analysts say that LX Semicon will secure new customers other than LG Electronics and LG Display through M&A, and that it will enter a turning point in increasing its product lineup. In this case, there is also an analysis that LX Semicon will succeed the legacy of the old LG semiconductors, thereby fulfilling the long wish of the pan-LG family.”

    (all translated from Korean using Google Translate so might be inaccurate)

    http://www.mediapen.com/news/view/733402
    https://twitter.com/MrFlacen/status/1540313521782947843

    6
  24. vko007

    July 15 “deadline” – https://www.thebell.co.kr/free/content/ArticleView.asp?key=202207071641364160104854&lcode=00&page=1&svccode=00

    MX has been hit as hard as any other semi (US…and otherwise seems like) and it looks like deal premium has vanished. R/R seems esp asymetric now…..any smarter takes?

    Related note – odds are this deal is all cash and the Jan 2024 12.5P is $2 bid, 15P looks like it can be sold for more than $3. It limits downside in case there’s no deal, and you’re selling 2 years of vol which it seems could be collected within a couple months on deal close. If there’s no deal my thought is you could prob get out for a very small loss since delta is much lower for such leaps (15p is well ITM yet 43 delta). If you get options, DYODD; if you don’t, you shouldn’t have read this.

    3
  25. g4734g

    I was actually selling the 12.5 puts today albeit at much shorter time frames….thanks for the idea……can you give a couple of sentences on the article since it is in chinese?

  26. Povilas

    Recent reports suggest there are now 4-5 companies interested in acquiring MX. In addition to LX Group, other potential bidders are two PE firms – Bain Capital and Han & Company – and “one or two additional domestic companies”. The rumoured price range is $20-$26 per share. LX and Han have reportedly completed their due diligence. Deadline for LX’s offer is July 15.

    “Bain Capital, a global private equity fund (PEF) manager, has begun reviewing the acquisition of Magnachip Semiconductor. As a result, the acquisition battle for Magnachip Semiconductor appears to be flowing into a competitive structure between strategic investors (SI) and financial investors (FIs). LX Group and Han & Company have each completed their due diligence, and it is understood that one or two additional domestic companies are considering acquisitions.” (translated from Korean with Google Translate)

    https://www.cctimes.kr/news/articleView.html?idxno=711814
    https://www.thebell.co.kr/free/Content/ArticleView.asp?key=202207081015310920108375&svccode=01

    3
  27. superk60

    Now down $12.3 after earnings with no M&A news for a month. What’s the outlook and valuation like here?

  28. dt

    MX turned out to be one of the more frustrating special sits to hold. Financial performance is deteriorating, while management continues to give hope for a recovery in 2023. The sale thesis has been stuck for a while now and so far no updates have been made from media on LX Group proposal. However, the company still remains visually cheap – 7x adj. EBITDA estimating $40m adj. EBITDA in 2022 (which should be an absolute bottom level performance with recovery expected next year). Moreover, MX has started the strategic review once again, however, the explanation behind it has been quite vague/underwhelming with most emphasis on reviewing the capital allocation plan. Its a good question whether management would really be in favor of a sale at the current bottom levels.
    From Q2 call:

    Suji Desilva
    First question on the Strategic Review Committee. I know you’ve been through this a few times in the past. I’m curious YJ, what triggers the formation of the Strategic Review Committee at this juncture, any insight there will be helpful?

    YJ Kim
    Yes, as we mentioned, we have reactivated Strategic Review Committee and they’re responsible for reviewing, considering, exploring and evaluating all the strategic alternatives. And that is to mainly to maximize shareholder value. And one of their mandates also includes reviewing the company’s capital allocation plan and also looking at other active strategic and transitional activities. So I think that is very good to look at all the alternatives, as well as reviewing the company’s capital allocation plan.
    So the situation has been dissapointing, no doubt. However, I’m inclined to wait a bit longer here to see the results of this strategic review/further news on LX Group intentions. By the way, the board has re-affirmed buyback plan of $37.5m (6.8%) outstanding, but its not clear how much more the share price must drop before they start implementing it.

    Q2 highlights:
    – Revenues were at $101.4m vs $100-$105m guidance.
    – Gross margins fell to 28.6% vs 33%-35% guidance.
    – Q3 revenues are projected at $70m-$75m with gross margins of 26.5%-28.5%.

    More details:

    https://www.bamsec.com/filing/119312522214908?cik=1325702

  29. dt

    After announcing a review of strategic alternatives last month, the company seems to have made a rather disappointing deliberation on capital allocation. On September 12, the management announced a slight expansion of its previously authorized buyback from $75m to $87.5m.

    As a reminder $37.5m from the authorization has already been repurchased. Moreover, management has not made any buybacks since March of this year contrary to our expectations. On the announcement, the stock dipped below $12/share. Unfortunately, the company still has not provided any updates on the sale process.

    https://www.bamsec.com/filing/95014222002693?cik=1325702

  30. Ilja

    According to Dealreporter, MX talks with LX Group have been halted since July and there is no active engagement right now. LX group, reportedly, views Magnachip deal as high risk and is looking at other targets. Moreover, another potential bidder NXP Partners is also no longer pursuing a transaction. Shares are down by more than 10% since the end of last month. Not clear whether any talks still are ongoing with other previously rumoured bidders.

    https://seekingalpha.com/news/3885628-magnachip-semiconductor-ticks-higher-on-report-lx-still-reviewing-bid

  31. dt

    As previously guided, MX released pretty weak Q3 results. The OLED business has been relentlessly hammered down from both supply and demand sides. Supply chain issues are still present, while from the demand side, increased inflation has dramatically reduced consumer spending and has resulted in an oversupply of channel inventories, particularly in China. This is a sector-wide problem that has similarly impacted other semiconductor peers, e.g. OIIM as well. Nonetheless, MX continues to point at the expected ‘significant recovery’ next year. MX is in discussions with multiple foundries to increase the supply capacity by 2x in 2023 compared to 2022, whereas the demand/client inventory corrections are expected to be resolved in time.

    During the conference call the company reiterated continuing to explore strategic alternatives. Assuming even a partial recovery of the OLED business next year, the stock is cheap. 60% of the market cap is now in cash. However, management hasn’t touched the buyback program at all during Q3, which is a bit concerning. Overall, a frustrating position to hold, however, at these levels I am inclined to wait at least until the strategic review is completed.

    Q3 results:
    – Revenue of $71.2m – within the guidance range of $70m-$75m;
    – Gross profit of 24.2% – below the guidance of 26.5%-28.5%;
    – Adj. EBITDA was negative $3m vs +$8.5m in Q2’22 and $26.4m Q3’21;

    Q4 guidance:
    – Revenue $57-$62m;
    – Gross margin 26%-28%.

    https://www.bamsec.com/filing/119312522275853?cik=1325702

Leave a Reply