Apple's Austrian roadkill looks like an M&A target
By Liam Proud
LONDON, Feb 5 (Reuters Breakingviews) - European chipmakers are a sorry bunch. Smartphone sales are slowing, while major customers like Apple are squeezing them on price. The best option for AMS, Austria's$1.9 billion sensor-chip specialist, may be a sale to a fellow supplier like STMicroelectronics.
AMS shares fell 16 percent on Tuesday after the maker of facial-recognition chips suspended dividends and said it wouldn't give a forecast for 2019 sales. The first problem is declining revenue: first-quarter sales will be between $350 million and $390 million, AMS reckons, compared with $491 million in the final three months of 2018. Second, behemoths like Apple are using their size to demand lower prices from suppliers: AMS's operating margin last year was 9 percent compared with 16 percent in 2017.
Selling may be a better option. Peer STM has about $700 million of net cash, using Refinitiv data, and will generate roughly $2.2 billion in EBITDA this year. That means it could pay a 25 percent equity premium for AMS, or $2.3 billion overall, absorb its debt pile and still keep leverage at an acceptable 1.1 times combined EBITDA. It'd gain extra negotiating clout with the likes of Apple and other phone and carmakers looking for sensor chips, and could rip out overlapping costs.
The returns look promising. Including debt and a 25 percent equity premium, STM's purchase price would be $3.7 billion. In return, it'd get AMS's $393 million of 2021 operating profit, using Refinitiv estimates. Taxed at Austria's 25 percent rate, the return is $295 million, or 8 percent before any cost or revenue synergies. Apple's Austrian roadkill could be an attractive M&A target.