ONNN Buys Sanyo's Chip Business - Analyst Blog

ON Semiconductor (ONNN) recently announced that it agreed to acquire Sanyo Electric Co.’s unprofitable semiconductor business in a cash-and-stock-deal valued at about $366 million. The company said the acquisition of Sanyo Semiconductor Co. will strengthen its presence in the automotive and consumer markets in the Asia Pacific region. The chipmaker, which competes with big names such as Texas Instruments (TXN) and Intersil Corp. (ISIL), said it sees the acquisition resulting in a charge but did not say how much.

Although ON Semiconductor, a part of Motorola Inc. (MOT) until 1999, has a decade-old presence in the Japanese market, it expects the latest acquisition to be a strategic fit, giving it increased access to what it says is an important part of the global semiconductor market.

Under the terms of the transaction, Japan’s Sanyo Electric, which is now owned by electronics maker Panasonic Corp. (PC), will receive about $129 million in cash and about $238 million worth of ON Semiconductor common shares, almost equal to 7–8% of ON Semiconductor’s outstanding shares.

Sanyo has a negligible presence in the global semiconductor market; hence, the sale provides a platform to shed a non-core business and better focus on areas such as rechargeable batteries and solar cells.

Sanyo has spent quite some time looking for a buyer for its semiconductor business, which was spun off into a separate entity back in July 2006. The spin-off was pursuant to a three-year restructuring plan initiated by the company in 2005, when the semiconductor fab was damaged by an earthquake.

Finding a suitable buyer has been difficult given the fact that the chip market has been doing moderately well since then, with no capacity constraints that would pressure a company into buying a lagging edge manufacturing facility.

However, the recent surge in demand for semiconductors has changed the situation, since almost all the chip companies are seeing capacity constraints. This was precisely the environment that Sanyo was looking for and it capitalized on the opportunity. In the meantime, Sanyo Semiconductor has reached breakeven and ON Semiconductor has secured Sanyo Electric’s support for the ongoing improvement of the facility’s manufacturing and operations.

Sanyo Semiconductor generates around $300 million a quarter and ON Semiconductor expects the acquisition to generate pre-tax income of around $30 million a quarter after around 1.5 years from the date the transaction closes.

We are unsure about the impact of the acquisition on ON Semiconductor. We see some immediate gains, such as increased capacity, a stronger manufacturing and sales presence in Asia, portfolio enhancements (power management products, microcontrollers, customized application specific integrated circuits and motor control devices), cross-selling opportunities and increased exposure to automotive, industrial and consumer verticals. However, the facility taken over could be a drag on margins when demand patterns normalize.

Read the full analyst report on "ONNN"
Read the full analyst report on "TXN"
Read the full analyst report on "ISIL"
Read the full analyst report on "MOT"
Read the full analyst report on "PC"
Zacks Investment Research

Market News and Data brought to you by Benzinga APIs