Hynix and Micron yesterday signed a non-binding MOU, which if fulfilled, could see the conclusion of one of Asia's most engrossing corporate sagas.
According to press releases from both companies, the agreement states that Micron will purchase Hynix's memory business in exchange for 108.6 million shares in Micron common stock. Given that Micron's closing price on Friday was around $29.5, this equates to an overall purchase price of $3.2 billion. Micron will also invest $200 million in cash for 15% of Hynix's other businesses.
In addition, Korean lenders - effectively Hynix's shareholders - will invest $1.5 billion in "long term financing for use by Micron in its Korean based operations".
At first glance, this deal must make all involved in the saga breathe a sigh of relief, as it looks as if it is coming to a close. But on closer inspection a dread fear might overtake them. This deal is fraught with risks for the creditors/shareholders of Hynix and unless some real strong-arming goes on behind the scene, there is bound to be some drawn out Korean haggling just waiting around the corner.
According to sources close to the deal, the shares that the Hynix lenders will be receiving will only be redeemable in three years time. Furthermore, after that period the shares will have to be sold, hard underwritten, in one block. The market risk of holding Micron stock for three years is large enough without the difficulties of then monetizing the stake through a single sale at the end.
The sources close to the deal also suggest that the $1.5 billion loan is a long-term facility รป suggesting more than three years. They also suggest that the interest paid on this loan will be capped at 5%, not the Libor +2% that has been rumoured in the Korean press.
However, sources close to Micron refuse to confirm the details of these smaller points. Steven Appleton, President and CEO of the company did admit that "there remain additional details to be negotiated before a definitive agreement can be reached". If there are further negotiations, they will likely surround these issues.
Given that Korean banks are known as the greatest hagglers since Marvin's parents, it seems strange that after five months of intense negotiations, a deal such as this should emerge. The banks look to be essentially taking a long-term leveraged play on Micron stock, which, as it will now become the largest semiconductor company in the world, is a play on the industry.
According to Jo Dutton, head of technology research at UBS Warburg in Korea, the semiconductor market is experiencing some weakness at present. "The supply cuts we saw last year have ended and there is seasonally weak PC demand from consumers. This has resulted in 5% price cuts [in DRAM memory prices] in April."
It is an extremely volatile business. The market risks of running a three year fixed position alongside a low return debt exposure are huge. It would be hard to find a portfolio manager who would agree to such terms.
What is interesting is why the Hynix creditors signed this deal. Here lies the intrigue. Until recently, the Micron negotiations were led by Korea Exchange Bank in its position as the chair of the Hynix Creditors Council. Four weeks ago the representatives from the Council went to the US to meet with Micron. There, KEB resigned its position as the leader of this group. Hanvit Bank's president, Lee Duk Hoon, took over the Council's leadership and since then, things have moved swiftly to this conclusion.
The fact is that KEB is 32.54% owned by Commerzbank and KEB's departure from leading these negotiations can only be an indication that they did not like the way they were going. Indeed Commerzbank has two out of the seven KEB board seats, including the position of deputy president. Herr Manfred Drost, who is also head of the loan committee, holds this position.
Hanvit, on the other hand is part of the Woori Financial Group. And this is 100% Korean government owned. It acts on the behest of the government, its sole shareholder. Its shareholders' best interests undoubtedly lie in getting this deal done. The damage to the overall image of Korea by such drawn out sagas as Hynix, has been severe. The government is well aware of this and so has been moving to get the mess cleared up.
Responding to queries from FinanceAsia, Yeoun-Sun Kang, the foreign press spokesperson of the Ministry of Finance and Economy says, "While we do not comment on specific companies, all the pending corporate deals have created large uncertainty in our markets. So it is the government's intention to wrap them up as soon as possible."
Micron and Hynix now aim to get the deal finalized and closed by April 30. For this to happen they need to get the approval of: the Hynix Creditors Council; the board of Hynix; and the board of Micron. They will then need the assent of: the US antitrust authorities; the EU antitrust authorities; and Hynix's long suffering shareholders.
Hopefully these will all be forthcoming. The semiconductor industry, as well as Korea Inc needs this deal to be done. There is just a nagging feeling that the fat lady has not yet sung. She might be limbering up in the wings, but Korean banks have a remarkable ability to negotiate right till the last drop of soju is left in their blood. The sense is that the government is forcing their hands on this one. In the process it is forcing through a deal that on paper looks better for the foreign acquirer than the domestic owners. Who says Korea has not changed?
