Intel (INTC +1.15%) announced its intention to acquire small Israeli chip foundry Tower Semiconductor (TSEM +5.21%) all the way back in February 2022. The deal, awaiting regulatory approval from China's State Administration for Market Regulation (SAMR), is delayed but had been expected to close by June 2023.
Here we are in earnings season in August, sifting through individual Tower and Intel financial updates. Is fab outfit Tower a buy ahead of some sort of final acquisition announcement?
NASDAQ: TSEM
Key Data Points
A discount to Intel's offer -- worth buying on those merits alone?
Let's start with the Intel offer to acquire Tower. Intel's proposal from nearly 18 months ago still stands at $54 a share in cash, valuing Tower at approximately $5.4 billion (when subtracting cash net of debt). As of this writing, Tower stock trades for under $38 a share. Should SAMR sign off on Intel's takeover, Tower shareholders would score a quick 40%-plus gain.
Final approval is still a question, though. As part of its own retooling, Intel will be accepting funding from the U.S. government via the $52 billion U.S. CHIPS Act. One of the caveats to accepting money, however, is a restriction on expanding certain semiconductor manufacturing in "China and other countries of concern" for 10 years from the date of funding.
China would obviously take exception to this, given it has its own aim to bolster its domestic chipmaking capabilities. Intel has sizable operations in mainland China (Tower has no fabs in China). So it would appear SAMR is delaying signing off on the deal as part of the U.S.-China chip war given this U.S. CHIPS Act restriction on investing in Chinese manufacturing in exchange for federal dollars.
Suffice it to say, investing in Tower in hopes of an Intel buyout involves taking a risk. Treat any eventual cash-out from Intel as a bonus.
Is Tower stock a buy anyway?
That leaves us to assess Tower Semiconductor on its own merits. And there's a good reason Intel would want to buy Tower, given its status as a top manufacturer of specialty analog chips -- sensors and power management circuitry used across lots of different industries.
As is the case across nearly the whole spectrum of the semiconductor industry right now, Tower is in the midst of a downturn. Revenue in Q2 2023 was down 16% year over year to $357 million and flat with Q1 2023. Earnings per share (EPS) was down 13% year over year. If Tower follows the general cadence of the rest of the chip industry, sales and EPS could start to rebound headed into 2024. However, no financial guidance is being given due to the pending deal with Intel.
Life as a tiny chip fab is tough, given how expensive it is to operate and constantly update manufacturing lines for never-ending semiconductor design innovation. But Tower did fairly well for itself over the last decade, ramping up sales and net income -- though free cash flow was lumpy due to spending on fab equipment.
Data by YCharts.
Presently, Tower Semiconductor stock trades for 15 times trailing-12-month EPS, a metric likely to get worse before it gets better as the chip industry downturn drags on. It doesn't look like a particularly amazing deal given the lack of forward guidance -- and especially not with the world's leading third-party fab services company Taiwan Semiconductor Manufacturing trading for a similar 16 times trailing-12-month EPS but with a solid outlook for growth picking up again next year.
I think Tower Semiconductor stock is worth keeping tabs on and could be worth considering if the Intel deal falls through (shares could take a tumble if the tie-up gets called off). But until then, betting on the cash-out from Intel looks too risky to me, and there's a lack of guidance from Tower in the interim. There are better buys to be had in the semiconductor market at the moment.
