ARM Holdings plc (ADR) (NASDAQ:ARMH) is soaring up about 40 percent at the time of this writing on the news of big bid by Softbank – so what are the details? Here are what the analysts think of the deal.
ARM Holdings plc (ADR) – Softbank deal – Analysts
Board of ARM has agreed for the company to be acquired by Softbank which is a company which holds a number of telecom, internet and ecommerce assets. These assets owned by Softbank do not compete with ARM nor are major ARM customers so we see no conflict of interest in this deal and ARM will likely remain an independent company owned by Softbank. We believe this was an unsolicited bid for the company so we do not think the company has not been “shopped” to other potential bidders meaning that if an independent bidder such as Softbank with a higher bid showed interest, the board coul d change its opinion. On the other hand we do not believe tech industry companies such as Intel, Apple are likely bidders because their bids create conflicts of interest as competitors (regulatory issues) and customers (to the business model).
Announced today, ARM board has recommended a 1700p all cash offer (43% premium on last close, 69% on 3-month VWAP) from the Japanese based investment company Softbank. On our FY16/FY17 numbers this represents EV/Sales 19/17x; EV/EBITDA 36x/29x and P/E 49x/39x.
Goldman Sachs – advising
Goldman Sachs & Co. and/or one of its affiliates is acting as financial advisor to ARM Holdings PLC and as such is a connected advisor of ARM Holdings PLC for the purpose of the UK Takeover Code published by the UK Panel on Takeovers and Mergers. Goldman Sachs Investment Research is currently Not Rated on ARM Holdings PLC and has removed the estimates for ARM Holdings PLC until the later of such time that the Takeover Code restrictions no longer apply or the European Investment Review Committee has determined that sufficient information is available and/or contingencies appear resolved to allow such analysis.
What happens post the deal? Post the acquisition, Softbank intends to i) run ARM as a separate entity within Softbank with ARM HQ still in Cambridge, UK; ii) retain ARM’s brand, senior management and partnership based business model;
iii) at least double the employee headcount of ARM in the UK, and iv) also increase ARM’s headcount outside the UK. In terms of deal rationale, Softbank notes the following benefits: i) accelerate adoption of ARM’s IP across existing and new markets (using Softbank’s industry expertise in telco and internet); ii) increase investments to drive growth and innovation (easier to execute as a nonlisted company); and iii) maintain dedication to innovation (more value per device and growth in upcoming verticals like Enterprise & IoT).
What happened? Softbank Group today announced a recommended 1700p all cash offer for ARM Holding, implying a 43% premium on the July 15th close, 69% on the 3-month VWAP. In an initial comment, Softbank says that it intends to invest considerably in the business, including doubling the UK headcount over the next five years and maintaining ARM’s unique culture and business model. Deal close is targeted for Q3 2016. Softbank comments that
anti-trust regulation should not impact the deal process. On the rationale of the deal, we note the following statement:”SBG intends to sustain ARM’s longterm focus on generating more value per device, and driving licensing wins and future royalty streams in new growth categories, specifically “Enterprise and Embedded Intelligence.”
Softbank’s balance sheet unlikely to be an issue given Alibaba, Yahoo Japan While Softbank’s net debt/EBITDA would likely increase towards 5x with this acquisition, we do not view leverage as an issue here. Softbank has several valuable holdings such as Alibaba, Yahoo Japan, among others which it could consider liquidating should it run into financial problems. Softbank also commented it is moving closer to fixing Sprint, its under-performing US telco acquisition. Given the high takeover multiple, we do not deem a counter-bid as likely.
We are referring to our view of the premium that Softbank is paying to acquire shares of ARM Holdings. SoftBank Group Corp. (9984-TKS, JPY 6007, Not Rated) and ARM Holdings (ARM-LN, 1189p, Market Perform) announced that they have reached an agreement on the terms of the acquisition for an all cash acquisition for 1,700 pence, for shares of ARM. This represents a 43% premium to Friday’s close. The enterprise value is ~£23.6 billion, and represents an EV/Sales multiple of a whopping 23x or a P/E multiple of 43x our 2017 estimates. The transaction is expected to close in 3Q16. SoftBank expects to fund the transaction with cash on hand and term-loan of ~£7.3 billion. Softbank also intends to double ARM’s headcount in the UK and increase headcount outside the UK.
We are downgrading ARM Holdings to a Market Perform rating because of the stock’s appreciation following the announcement of the company’s acquisition by SoftBank Group Corporation for more than $32 billion, which represents a more than 40% premium to the stock’s closing price on Friday, July 15. Given the significant move in the stock, we believe that ARMH is fully valued at current levels.
Despite near-term tougher royalty compares, Softbank sets a premium to new market royalty growth prospects: Through ARMv8-M, CORDIO connectivity, and mbed software growth in MCUs/IoT, new ARMv8 wins with many established vendors in
networking, and rapidly growing semiconductor content per vehicle in automotive, we believe ARM is well positioned for strong royalty growth in these emerging markets starting late in 2016 and beyond. ARM estimates these combined markets represent
$60B in 2020 silicon TAM, with ARM having <30% share in each market today, and we anticipate both share gains and royalty/unit expansion over the next several years. We believe these markets will begin to contribute materially in 2H/17; our 2017 royalty
growth estimate returns to 20% Y/Y after tougher compares during 2016. Given growth prospects in these markets and solid but slower mobile royalty growth from gradually higher royalty/unit, we believe growth rates approaching 20% are sustainable and agree with Softbank that these growth prospects were undervalued in the previous share price. Admittedly, however, we were surprised by the 40%+ premium bid.
What do you think?