News

7 September 2006

 

Filtronic's Wireless Infrastructure sale revised

The agreement of 12 June for base-station RF product supplier Powerwave Technologies Inc of Santa Ana, CA, USA to acquire the majority of Filtronic plc's Wireless Infrastructure division for $150m (£81m) in cash and 20.7m
new Powerwave shares has been revised to $185m (£96.9m) in cash and 17.7m new Powerwave shares (worth $134.5m, as of 1 September, giving $319.5m in total). This is to account for the fall in the market price of Powerwave
stock and hence the value of the original proposal since 12 June.

Subject to Filtronic shareholders approving the proposal at an Extraordinary General Meeting on 29 September, the transaction should be completed by early October. It is expected that Filtronic will have an equity interest in
Powerwave of13.6% on an undiluted basis and of 10.9% on a fully diluted basis (assuming conversion of Powerwave's convertible subordinated notes). Following the disposal of the Powerwave stock, Filtronic intends to return substantially all of the net proceeds, plus £18.5m of the cash, to shareholders.

The product lines included comprise transmit/receive filters, integrated remote radio heads and power amplifier products, all for use in commercial wireless infrastructure base-station equipment, but not point-to-point radio
backhaul equipment.

Following the disposal, the group's performance will be substantially reduced and will result in operating losses while refocusing on the three continuing businesses of point-to-point backhaul equipment, defence electronics, and compound semiconductors. A key part of the strategy is to achieve growth in value for compound semiconductor activities, says Filtronic.

The net cash proceeds of the disposal, minus £18.5m, will be used to repay outstanding bank debt (£12.7m at end-May), fund corporate working capital requirements (£22.5m), and fund up to £15m of continuing investment in the capacity expansion of Filtronic Compound Semiconductors Ltd's wafer fabrication plant in Newton Aycliffe, County Durham, UK, which currently supplies GaAs pHEMT wafers to several switch module suppliers for cell-phone handsets.

Filtronic Compound Semiconductors Ltd is now believed to provide 20% of the overall market for 4-way and above mobile phone pHEMT switches, which are expected to increase market penetration of the overall mobile phone market to 80% over the coming three years. Revenues grew 142% from fiscal 2005's £8.6 to fiscal 2006's £20.8m, and losses shrank from £11.7m to £5.1m. The business reached its target of operating profit break-even run-rate over fiscal fourth-quarter 2006 (to end-May), after absorbing cost increases associated with commissioning further capacity in the second half of fiscal 2006.

As well as high-volume production for handset switches, Filtronic Compound Semiconductors Ltd has also developed lower-volume production in higher-margin markets for the merchant market (including supply to the Wireless Infrastructure Business and other parts of the continuing group) and for defence applications (including initial volume production orders from SELEX).

While there was some disappointment in sales of merchant semiconductors, this was caused largely by the priority of meeting steep customer demand for switches, says Filtronic. However, future additional capacity will allow
Compound Semiconductors to establish a stronger presence in the merchant semiconductor sector, the company reckons.

As a result of a detailed assessment of future wafer requirements, Filtronic has phased its plans for the capacity increase and is currently undertaking the Newton Aycliffe capacity expansion in line with forecast demand for the
current financial year. The financing plan requires less than £15m of additional cash for this financial year, after which the business is targeted to be self-financing.

To assist in financing the expansion pending completion of the Wireless Infrastructure Business disposal, in May Filtronic arranged an additional bank facility (a loan of £15m, amended to £10m on 2 August), re-payable by
end-November. Together with an existing revolving multicurrency facility of £18m (repayable by end-August 2008) and an overdraft of £2m, current bank facilities are £30m.

With the profile of capacity deployment, revenue growth for continuing business of over 25% is expected in each half of the current financial year, including initial growth in merchant semiconductors and non-switch volume products and growth in demand to support filter and backhaul radio products.

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