Infineon to Acquire International Rectifier for $3 Billion

Aug 21, 2014 9:45 am ET

(Updates shares in fifth paragraph.)

Aug. 21 (Bloomberg) -- Infineon Technologies AG, Germany’s largest chipmaker, agreed to buy International Rectifier Corp. for about $3 billion in cash, adding to its power-management technology business.

Infineon will pay $40 a share for El Segundo, California- based International Rectifier in a deal approved by both companies’ boards, Infineon said yesterday. That’s 51 percent more than the stock’s close before the deal was announced. The acquisition is Infineon’s biggest, according to data compiled by Bloomberg.

Chief Executive Officer Reinhard Ploss, seeking a deal since taking the top job in 2012, is betting on rising demand for chips such as those used in car electronics and to manage battery power in mobile devices. The deal also puts Infineon closer to the technology hub of Silicon Valley.

“It is very important for us to be in the U.S. and close to the highly innovative region of California,” Ploss said on a conference call. “International Rectifier does that.”

Infineon shares rose 0.8 percent to 8.67 euros at 3:41 p.m. in Frankfurt. International Rectifier added 0.1 percent to $39.14 in New York. The stock jumped 47 percent yesterday, as other semiconductor shares also surged after Bloomberg News reported that Infineon was nearing a takeover.

Deal Repercussions

International Rectifier makes chips that help manage power flow in devices including satellites, cars, lighting systems and aircraft. The company reported a 13 percent increase in revenue in the year ending in June to $1.11 billion, and swung to a profit of $58.7 million after reporting an $88.8 million loss previously.

The deal will be funded using cash and a 1.5 billion-euro ($2 billion) line of credit, and will be accretive to pro-forma earnings per share in the fiscal year ending in September 2015, Infineon said. Infineon, based near Munich, expects to complete the purchase by early 2015, subject to regulatory approval.

Infineon expects so-called sector profit at International Rectifier to catch up with its companywide goal of 15 percent of earnings within two years of the deal’s completion, Chief Financial Officer Dominik Asam said on a conference call with journalists, declining to specify what cost savings the integration of the company might generate.

Asam expects to cut jobs at International Rectifier, which has administrative costs that are 4 percent higher than Infineon’s relatively, he said. There’s also scope to manufacture some International Rectifier products at Infineon’s existing facilities, Asam said.

Busy Year

The fully diluted enterprise value of International Rectifier is about $2.4 billion, Infineon said in a statement.

The chip industry has been gripped by consolidation as companies combine and pool resources in response to rising costs of design and fabrication. Almost $11 billion in North American semiconductor transactions were announced in the first half, according to data compiled by Bloomberg, the busiest year for deals in the sector since 2011.

Last year, Avago Technologies Ltd. agreed to buy LSI Corp for $6.6 billion, and semiconductor-equipment supplier Applied Materials Inc. agreed to acquire Tokyo Electron Ltd. in a multibillion dollar deal. This year, RF Micro Devices Inc. agreed to buy TriQuint Semiconductor Inc. for about $1.5 billion and Intel Corp. agreed to acquire Avago Technologies Ltd.’s Axxia networking business for $650 million this month.

Yesterday, Fairchild Semiconductor International Inc. shares jumped as much as 8.8 percent; Power Integrations Inc. increased as much as 13 percent; Semtech Corp. climbed as much as 10 percent; and Intersil Corp. rose as much as 5.5 percent.

Four Quarters

Infineon increased profit for the past four straight quarters and its net cash reached 2.1 billion euros at the end of June. In May, the chipmaker said it would raise its dividend as early as this fiscal year as advances in productivity curb the investment needed to achieve its target growth rate.

“They would like to build a stronger presence in power management,” said Janardan Menon, a Liberum Capital Ltd. analyst. The part of the industry Infineon is targeting has “high barriers to entry and strong growth prospects.”

The stock reached an all-time low in 2009, amid the bankruptcy of memory-chipmaker Qimonda, which it carved out of the main business in 2006. Since then Infineon has cut costs, restructured finances and sold its wireline and mobile-chip divisions, the latter to Intel. Under Ploss’s watch, Infineon shares have jumped about 66 percent. They are up 11 percent this year.

Bank of America Corp. and Citigroup Inc. advised Infineon on the acquisition and are underwriters on the credit line. International Rectifier was advised by JPMorgan Chase & Co. Kirkland & Ellis LLP and Freshfields Bruckhaus Deringer LLP acted as counsel for Infineon while Fried Frank Harris Shriver & Jacobson LLP worked with International Rectifier.

--With assistance from Jack Clark and Ian King in San Francisco, Manuel Baigorri, Matthew Campbell and Aaron Kirchfeld in London and Dinesh Nair in Dubai.