A possible Qualcomm takeover of Intel has Wall Street buzzing.
But would a deal be good for the companies—and ultimately shareholders?
Not great, at least based on one analyst who took a hard
look at the numbers.
Now, Qualcomm only approached rival Intel, The Wall Street Journal reported. Still, that was
enough to get most everyone’s attention.
Dave Novosel, a senior analyst at corporate bond research
firm Gimme Credit, mentioned the huge amount of debt that Qualcomm could take
on in a research note Wednesday. Such an enormous amount, in fact, that the
debt could sink to junk levels.
That got Barron’s to take notice. We asked
him to walk us through a deal that may or may not even happen.
Intel and Qualcomm didn’t respond to Barron’s questions
on funding and the possibility of a deal.
First, some background. Qualcomm, which makes modem chips and supplies huge numbers
to Apple, has a market value of $186 billion.
Intel, once the king of U.S. chipmaking, is valued at $97.5
billion—a little more than half of Qualcomm’s market valuation. Intel stock has
plunged 54% this year on its struggles to attract major customers. The company
has even suspended dividend payments.
So, Intel is attractive—from an investment standpoint.
But Qualcomm would put itself at risk with financing.
Considering a premium of about 14% on the market value, the company would have
to pay roughly $110 billion for Intel, Novosel estimated. More than likely, he
said, the financing would be a combination of equity and debt.
The less equity Qualcomm would opt to use, the more
favorable it would be for current investors.
When a company uses equity to finance an acquisition, it
issues new shares to pay the shareholders of the target company. This expands
the investor base, but dilutes the value for current shareholders. For example,
an existing shareholder who owns 10% of 1 million shares, would get reduced to
6.67% if shares outstanding increase by 500,000.
Assuming Qualcomm would opt for 70% debt and 30%
equity—minimizing dilution for investors and avoiding a bloated debt load—the
company has to raise roughly $77 billion of debt. It already has a combined
short-term and long-term debt of $15.4 billion.
Right now, Qualcomm’s debt is rated at A2 by Moody’s Investors Service and A by S&P Global Ratings agency—both indicate a
high-grade and a low credit risk for investors buying it.
But if Qualcomm would tack on another $77 billion to buy
Intel, its “leverage would soar to more than 8x, commensurate with the leverage
of high-yield credits,” Novosel said.
Simply put, the new combined entity—Intel and Qualcomm—may
have a total debt on the balance sheet that’s many fold their estimated 2024
earnings before interest, taxes, depreciation, and amortization—Ebitda.
Assuming Qualcomm would opt for 70% debt and 30%
equity—minimizing dilution for investors and avoiding a bloated debt load—the
company has to raise roughly $77 billion of debt. It already has a combined
short-term and long-term debt of $15.4 billion.
Right now, Qualcomm’s debt is rated at A2 by Moody’s Investors Service and A by S&P Global Ratings agency—both indicate a
high-grade and a low credit risk for investors buying it.
But if Qualcomm would tack on another $77 billion to buy
Intel, its “leverage would soar to more than 8x, commensurate with the leverage
of high-yield credits,” Novosel said.
Simply put, the new combined entity—Intel and Qualcomm—may
have a total debt on the balance sheet that’s many fold their estimated 2024
earnings before interest, taxes, depreciation, and amortization—Ebitda.
That level of leverage matches junk-rated bonds and could
lead to Moody’s and S&P Global downgrading Qualcomm credit ratings to junk.
And the implications of that are serious: Qualcomm probably would have higher
borrowing costs in the future, which can increase the cost of capital.
On the other hand, Qualcomm could eventually save on costs
by integrating Intel. Qualcomm, with its own $7.7 billion in cash as of June, could offset some
future expenses from the deal. These savings and cash might keep away any
credit-rating downgrade.
“The agencies may [also] not drop the rating below
investment grade because of the size and scale of the combined entity and the
potential to grow into the capital structure,” he said.
The takeaway from the walk-through with Novosel: Investors
should consider very real risks to Qualcomm if the companies keep talking.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com
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