MIZUHO SECURITIES USA INC. | US EQUITY RESEARCH
Summary
QCOM announced the agreement to acquire NXPI for $110 per share, a modest ~13x F18E consensus of $8.32. While NXPI investors would have liked a better premium, it is a win for QCOM shareholders, and we believe ultimately creates a strategic powerhouse L-T. We are adjusting NXPI estimates post earnings and adjusting NXPI PT to $110 (prior $120) based on the deal price. Our take below.
Key Points
QCOM acquires NXPI ...Finally... but Investors would have liked a better premium. NXPI noting the $110 deal (EV of $47B) puts an ~34% premium to the trailing 30-60 day price levels, though we have shown average premiums at 40%+. NXPI is being acquired at ~13x F18E EPS of ~$8.32 versus TXN trading today at ~21x P/E. Nonetheless we think the merger creates significant L-T value and solidifies a strategic global vision of redefining transportation and connectivity.
A Look at the deal. The transaction is for cash and will be financed by cash on hand and debt. QCOM intends to maintain global liquidity of $8B with new debt financing of ~$11B. But QCOM expects to get back to pre-transaction leverage in 2 years, as it generates, by our estimate a combined $10B of FCF/year. QCOM also sees $500M annualized synergies (65% Opex) for 2 years. Overall we believe a sweet deal for QCOM as it transforms the commentary from a maturing handset to secular growth story for the next decade.
The deal is structured as a tender offer given a U.S entity buying a Dutch entity, and expected to close by December 2017 (modestly longer than the 3 quarter that NXPI/FSL and AVGO/BRCM deals were completed) given regulatory approvals required in 9-jurisdictions.
Adjusting our NXPI estimates and PT to $110 (the deal price). We do not see much of a potential for competing bids, and if there were, we would expect QCOM to raise its offer given the ~$6B of tax accretion from using offshore cash. Also, a strong combined FCF and the L-T strategic value to QCOM better solidifies this combination. For NXPI, F16E remain at $9.5B/$5.75, F17E from $10.3B/$7.88 to $9.2B/$6.85 and F18E from $10.8B/8.27 to $9.4B/$7.49 as we have now accounted for the STDP divestiture and modestly higher share count. We see a combined NXPI/QCOM F18E at $6.47 (prior $6.36). We would note the increasing attraction for automotive portfolios with two key players, ON and CY, each with ~35% of revenue from auto.
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