Today, Tokyo Electron (8035 JT) shares fell -15% on the back of news overnight that the merger with Applied Materials (AMAT US) had been scrapped – despite the shares having traded weaker against a predominantly stronger market for the past two weeks and the company saying that it would purchase up to JPY120bn of its own stock. QMG data remains very positive on the products that 8035 produces (JA32.1 and JA33.3), and we consider this an ideal time to revisit the stock.
- Background to AMAT merger: Way back on 24/9/13, Applied Materials (AMAT US) announced its intention to merge with Tokyo Electron by way of a 3.25:1 shares deal. This valued the combined company at c$30bn (to be called Eternis) and would have resulted in 8035 shareholders owning 32%. Having secured most of the regulatory approvals required, the US DoJ – which had raised competition concerns – rejected the proposed remedies to protect competition scuppering any ‘realistic prospect for the completion of the merger’.
- As to the specific concerns raised by the DoJ, we note that the combined entity would have had c25% share of the total equipment market and closer to 50% across some specialist product groups (creating near-duopolistic markets in some cases). Whilst the market was not privy to the specifics of the competition concessions offered to the regulator, we suspect that after 18 months of negotiation considerable compromise would have been put on the table, which leads us to suspect that the more probable reason for blocking the deal was political. This deal was a ‘tax-inversion’ deal, in that part of the merger involved the combined entity moving its domicile to the Netherlands, thus reducing the amount of US tax paid on foreign profits.
- The significant volume traded today can be explained by arb funds unwinding active positions – and would represent an opportune time for fundamental investors to be buying. QMG product level data shows sales and margins at the product level increasing at above average (and greater than consensus forecast) levels – underpinned by very strong volume growth.
Consensus estimates currently forecast just 7% FY sales growth – compared with QMG data for JA32.1 showing +16.2%. The shares now trade at a discount to both historic average multiples (just 6.9x EV/EBITDA compared to trailing 3 year average of 13-15x) and peer group average (current PER 14x vs 16x) as well as offering a relatively attractive dividend which yields c100bps more than the Japanese market average.
QMG Sales for Product Group JA32.1 – Manufacturers of Electronic Components