SanDisk, Western Digital Merger: Key Questions in a Potential Deal

SanDisk, Western Digital Merger: Key Questions in a Potential Deal

A recent report suggested that SanDisk Corporation was in advance negotiations to sell itself to Western Digital, and both companies are expected to reach an agreement as early as this week.

People familiar with the situation told Bloomberg that Western Digital was considering an acquisition price of around $80 to $90 per SanDisk share. According to them, there is a possibility that the talks could still fall apart.

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Western Digital also recently announced the decision of China’s Ministry of Commerce (MOFCOM) allowing the integration of a significant portion of Hitachi Global Storage Technologies (HGST) to its subsidiaries. In addition, it was recently reported that Unisplendour acquired a Board Seat and a 15% in Western Digital for $3.775 billion.

Analysts at Stifel noted the increasing speculations that Western Digital is considering to acquire SanDisk. According to them, they have no knowledge of any M&A discussions between the companies.

Key questions that may arise in a deal between Sandisk and Western Digital

Stifel analysts Aaron Rakers and his colleagues believed that there are several important considerations/questions that may arise in a transaction between SanDisk and Western Digital. These considerations include SanDisk’s 3D NAND positioning, joint venture with Toshiba, capex intensity, Intel’s involvement, and other factors.

SanDisk 3D NAND Flash positioning

According to Rakers and his fellow analysts, one of the most important questions in a deal between SanDisk and Western Digital would be their combined positioning for the expected acceleration of 3D NAND Flash.

They also noted that it is important to consider the company’s positioning for next-generation technologies such as 3D ReRAM. It was widely reported that SanDisk is behind Intel, Micron, and Samsung in 3d NAND Flash and decided to push forward with 14nm planar NAND.

SanDisk joint venture with Toshiba

The analysts observed that SanDisk obtains all of its NAND supply from Toshiba under its joint venture. SanDisk has the right to ~225,000 wafer starts per month (WSPM) of NAND Flash capacity and Toshiba has the right for the same number of WSPM (50/50 split in production capacity).

The companies have three specific partnerships (collectively known as Flash Ventures) in 300 millimeter NAND Flash manufacturing facilities. SanDisk owns 49.9% equity interest in each of the Flash Ventures partnerships. It is committed to fund as much as 50% of the other costs of the partnerships. According to the analysts, the revenue of Flash Ventures from wafer sales to SanDisk and Toshiba were insufficient to cover its costs.

SanDisk capex intensity

The analysts emphasized that investors will definitely ask Western Digital’s expectations about its capex intensity when combining with SanDisk, which has an average capex spend of approximately 19% of total revenue over the past five years. Western Digital maintained a capex spend of around 5% to 7%.

Rakers and his colleagues said investors should consider SanDisk’s cash return from Flash Ventures. They noted that SanDisk expected its 2015 capex to be ~$1.4 billion. Its cash usage is expected to be around $500 million or ~9% of the current consensus revenue estimate. The analysts estimated that the company’s average cash outlay for capital investments is around 4% of total revenue.

Intel’s involvement

Furthermore, the analysts believe that investors should ask Intel’s potential part or involvement in the merger between Western Digital and SanDik. They emphasized that Intel has development partnership with HGST and 20% stake in Tsinghua Unigroup, the parent company of Unisplendour. Take note that Unisplendour owns 15% stake in Western Digital.

“We believe Intel remains focused on strategically positioning itself in adjacent areas around CPUs as the industry gauges the impact of slowing Moore’s Lae going forward—next generation memory is one of these key areas,” according to the analysts. At present, Intel is acquiring NAND Flash from Micron, and both companies are jointly developing the next generation 3D X-Point technology.

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