Consolidation could be coming to the flash-memory chip market, and investors are excited about the possibilities.
By Eric J. Savitz - Dow Jones Wires - Barrons.com
After the close of trading on Wednesday, The Wall Street Journal reported that both Western Digital (ticker: WDC) and Micron Technology (MU) are considering an acquisition of Kioxia Holdings, a Japanese memory-chip company, for about $30 billion.
Kioxia, which originally was Toshiba’s memory-chip business, is controlled by a group of investors that includes Bain Capital, SK Hynix, and Toshiba, among others. The Journal said a deal could be completed later this spring. Last year, Kioxia had planned to go public, but withdrew its initial public offering amid volatile market conditions.
The news emerged right in the middle of a call Micron held with analysts and investors to discuss its results for the February quarter. Both the numbers and management’s financial forecasts were better than expected as a result of growing demand and improved pricing for both DRAM and flash memory chips.
But the focus Thursday is not on the strong results, but on the potential further consolidation of the flash-memory sector. In October, of course, Intel (INTC) said it had agreed to sell its flash business to Hynix.
The Kioxia situation is complicated by the fact that the Japanese company’s chip-fabrication plants are operated in joint ventures with Western Digital. The two companies evenly split production; Western Digital doesn’t independently own its own fabs.
Another complication is that Western Digital’s current market capitalization, at about $22 billion, is well below the $30 billion the Journal reported as a purchase price for Kioxia. Western Digital has been working to reduce debt left over from its $19 billion acquisition of SanDisk in 2016. At year-end, Western had just under $9 billion in long-term debt outstanding, offset by about $3 billion in cash.
Micron is a larger company by market cap, at about $104 billion. In that sense, it would seem better positioned to acquire Kioxia. But that would create a complicated relationship that would have Western in a joint venture with a key rival.
In a research note Thursday morning, Susquehanna Financial Group analyst Mehdi Hosseini says the logical solution would be for Micron to buy Western Digital. In that scenario, the current joint ventures between Western Digital and Kioxia would remain intact, he says, while providing Micron with “best in class manufacturing assets without owning the assets.” He thinks Kioxia could then still proceed with its previously contemplated IPO.
He also says that the $30 billion price tag the Journal floated for Kioxia suggests Western Digital shares are greatly undervalued, given the company owns half of Kioxia’s fabs. Barron’s made a similar point in a Tech Trader column last September .) The implication is that Western Digital’s own flash business would have a similar value, which would suggest investors are getting the Western Digital disk-drive business for less than zero.
Hosseini estimates that Kioxia and Western Digital together control about 34% of the NAND market, with Samsung just behind at 33%, and SK Hynix and Intel combined at 16%, and Micron at 14%. He estimates that Western has about 15%-20% of the enterprise solid-state drive market, with Samsung at about 50%, Intel at 25%. and Hynix and Micron at under 5% each.
The analyst thinks that Micron’s NAND business is becoming “increasingly marginalized” given the pending SK Hynix deal for Intel’s NAND unit.
“Acquiring Western would help Micron with access to additional NAND wafers while not having to deal with a high capex structure,” he writes. “Kioxia and Western Digital [and predecessor SanDisk] have been partners and competitors for decades. The same three-way partnership could exist with Micron acquiring Western Digital, which would effectively sustain the JV structure while enabling Micron to secure additional NAND wafer capacity without building any new fabs.”
Both Western Digital and Micron declined to comment. Kioxia didn’t respond to a request for comment.
The potential for a Micron bid for Western Digital raises the question whether Micron would keep Western’s hard-disk drive business, which basically operates in a near duopoly with its chief rival, Seagate (STX). Last fall, Western Digital announced a reorganization of its business to effectively separate the flash and drive businesses, a move that created speculation on the Street that Western could eventually split into two companies.
The company has repeatedly denied that it might do that. But it isn’t hard to envision Micron spinning off or selling Western’s hard-drive business as part of the transaction.
On Thursday, Western Digital shares spiked 5.9% to $70.67, Micron gained 4.9% to $92.51 and Seagate rose 1% to $77.5