10 January 2013

IQE to acquire Kopin’s III-V assets for $75m; share placing to raise £16.5m

Epiwafer foundry and substrate maker IQE plc of Cardiff, Wales, UK has agreed to acquire the Kopin Wireless compound semiconductor epiwafer manufacturing division of Kopin Corp of Taunton, MA, USA (including its leased manufacturing facility there), plus its 90.2% controlling interest in subsidiary Kopin Taiwan Corp (KTC) in Hsinchu, Taiwan.

IQE will pay Kopin $75m in cash: an initial consideration of $60m on completion of the acquisition (expected on or around 16 January), plus a deferred consideration of $15m on the third anniversary of completion.

Kopin supplies III-V semiconductor products and microdisplays for mobile applications (including smartphones, tablet PCs, military thermal weapons sights and wearable computers. Its Kopin Wireless business uses metal-organic chemical vapor deposition (MOCVD) epitaxial wafer technology to manufacture heterojunction bipolar transistor (HBT) materials for power amplifiers (PA) used in mobile communications devices. Kopin began producing III-V HBTs on gallium arsenide substrates in 1996.

IQE says that the acquisition significantly extends its market share in wireless industry supply and delivers a market-leading position in MOCVD HBTs. The firm also says that it builds on its risk-mitigation strategy in wireless - adding Skyworks Solutions Inc of Woburn, MA, USA (which has a long-standing supply agreement with Kopin Wireless, with a current contract running until end-2013) as a major customer (guaranteeing a significant proportion of Skyworks’ business).

Kopin Wireless also supplies HBT wafers to Taiwan’s Advanced Wireless Semiconductor Company (AWSC), which provides foundry services to Skyworks. Kopin estimated that, in 2012, 28% of its total revenue of $131.1m were derived from sales of gallium arsenide products to Skyworks. Other significant Kopin Wireless customers include RF Micro Devices Inc of Greensboro, NC, USA and TriQuint Semiconductor Inc of Hillsboro, OR, USA.

IQE adds that Kopin’s Taiwan manufacturing facility adds to its global manufacturing footprint, providing a strong position to access the growing Asian semiconductor market.

Kopin Wireless generated revenue of $66.5m (with EBITDA of $11.2m) in 2011, and $44m (with EBITDA of $7.5m) in the nine months to 29 September 2012. Net assets are expected to be about $42m.

The $75m acquisition will be financed partly through a new banking facility with HSBC Bank plc for $40m (be repayable in 20 quarterly instalments of $1m from 31 March 2013, plus $16m payable on 30 June 2015 and $4m payable on 31 December 2017).

In addition, a placing with institutional investors (via joint bookrunners Espirito Santo Investment Bank and Canaccord Genuity Ltd) of 56,900,961 new ordinary shares (about 8.82% of the group’s enlarged share capital following admission) at a price of 29 pence each will raise about £16.5m. The placing price represents a discount of about 0.85% to the 29.25 pence closing mid-market price of IQE’s shares on 9 January (the last practicable date before the announcement). About £12.5m ($20m) of the placing proceeds will go towards the initial consideration. The remaining £4m will be used for general corporate purposes and acquisition and placing expenses.

Organic cash flow should provide cash for the deferred consideration of $15m payable in January 2016.

“This acquisition is our third key transaction in the past 12 months,” says IQE’s CEO Drew Nelson. “It significantly enhances our scale and provides us with a highly complementary product line in the wireless space,” he adds. “The transaction marks another major step forward in our risk-mitigation strategy, whilst significantly boosting our wireless market share. At the same time, it delivers excellent opportunities for additional business growth, particularly in Taiwan and from there into the Asian semiconductor market,” Nelson continues.

“This transaction will be a key driver of significant earnings and cash generation and also brings substantial financial and scale benefits,” Nelson reckons. “This will enable the group to make significant cost savings from fiscal-year 2014 onwards.”

In a trading update for full-year 2012, IQE says that it expects revenue of £87-88m, with earnings before interest, tax, depreciation and amortisation (EBITDA) of £16-17m and net debt as at end-December 2012 of £15.5m. The firm reckons that the acquisition will be earnings enhancing from 2013 onwards. Also, due to its expanded global footprint and increase in scale, IQEexpects cost synergies of at least £7m per annum on a recurring basis from 2014. As part of the plan to achieve this, one-off exceptional costs should be about £3m in 2013 and £2m in 2014.

Kopin says that the divestment will enable it to focus exclusively on continued commercial development of its Golden-i mobile communications technology platform, as well as on its microdisplay products. “Over the past 17 years, our III-V technology has contributed significantly to the operational success of Kopin and to advances in the wireless handset market,” says Kopin’s president & CEO Dr John C.C. Fan. “However, while the III-V product line is successful we have made the strategic decision to focus on our Golden-i technology... shareholders will be more effectively served by having the company focusing its resources on expanding the commercial development of Golden-i and our display product line,” he believes.

See related items:

IQE confirms discussions regarding "significant acquisition"

IQE completes CPV technology process transfer milestones with Solar Junction

IQE completes acquisition of RFMD’s MBE epi manufacturing unit

Tags: IQE Kopin

Visit: www.iqep.com

Visit: www.kopin.com