Micron could buy Qimonda at 'fire sale price,' analyst says

"We see insolvency as a very real possibility, with Micron the most immediate beneficiary as it should have the opportunity to snap up (Qimonda’s) assets at fire sale prices," commented Daniel Berenbaum, analyst at Cowen and Company.

By Ann Steffora Mutschler, Senior Editor -- Electronic News, 9/26/2008

Following the speculation Monday that the rumored acquisition of Qimonda AG by Micron Technology Inc is expected to materialize in the near future, analyst Daniel Berenbaum at investment banking firm Cowen and Company said today in a report today that Qimonda may have missed its window to sell the assets of the company (particularly its stake in manufacturing partner Inotera) at a reasonable price.

“We see insolvency as a very real possibility, with Micron the most immediate beneficiary as it should have the opportunity to snap up assets at fire sale prices,” Berenbaum noted.

Things started going downhill for Qimonda when DRAM prices continued to plummet last year and in December the company consolidated all of its North American design and development operations and integrated them at its Raleigh, North Carolina location. As part of this, Qimonda’s design and development center in Burlington, Vermont was closed which employed approximately 125 people.

Then in January, the company reported a fiscal Q1 net loss of $871 million, compared to a net loss of $386 million in fiscal Q4 2007 and net income of $258 million in fiscal Q1 2007, while sales decreased 28% to $747 million from $1 billion in the previous quarter and dropped 56% year over year from $1.7 billion.

Qimonda’s cash burn seems terminal, Berenbaum wrote, with additional financing likely difficult to come by. “Our checks and analysis suggest that Qimonda has less then two quarters worth of operating cash remaining. Although debt/equity is low relative to other commodity chip companies, it’s difficult to arrive at a scenario where cash flow from operations turns positive in the next year, which means that it will likely be hard-pressed to secure additional financing. With no white knight in sight, we don’t see how the company will be able to continue operations in its current form much beyond the end of the year,” he said.

In the event that Qimonda were to file for bankruptcy protection, Berenbaum expects Qimonda’s Dresden and Richmond fabs to come off-line for some period of time. “These facilities represent approximately 4.5% of global DRAM bit supply. This will not be enough to immediately bring supply/demand back into balance, but spot pricing and other DRAM stocks will likely see a benefit,” he wrote. Additionally, Micron seems well-positioned to pick up the Richmond fab (or at least the shell since checks suggest that most of the equipment has been sold to financiers and is leased back) at fire sale prices, he added.

Berenbaum reiterated his “Underperform” rating on Qimonda’s stock and lowered estimates on the company as DRAM fundamentals remain weak and cash burn seems terminal.

As for Micron, the Qimonda situation is likely a near-term positive for the company, he believes.

With clock ticking for Qimonda, and with no white knight in sight, Berenbaum suggests that Qimonda’s cash burn will likely drag the company under within the next two quarters. “There are many possible scenarios, but we expect the Dresden and Richmond fabs (around 4.5% of global DRAM supply) to come off line for some period of time. Ultimately, we think Micron will pick up the Richmond fab on the cheap, and Nanya will take over Qimonda’s piece of the Inotera JV and start a supply/royalty arrangement with Micron. This scenario should be accretive to Micron as early as FY09, particularly if it allows a reduction in capex as we expect,” he said.

Key upcoming issues for Micron include its fiscal Q4 report due October 1, during which Berenbaum expects commentary on the effect of the recently announced competitor capex reductions on supply/demand; details of Micron’s own capex reductions; NAND market elasticity (or lack thereof); and progress on cost reduction where Micron now seems to be the industry leader.

“It’s tough to see how Micron stock can move sustainably higher given continued weak memory industry fundamentals, but at current valuations it seems to be pricing in a worst-case dilutive acquisition of floundering competitor Qimonda. We expect Micron to wait for Qimonda to fail, and then pick up the pieces at fire sale prices. This could be a catalyst for a trade off recent historical low valuation levels. Longer-term, we expect the stock generally to trade in a range centered around a 20% discount to book value,” he concluded.