Western Digital is facing an investor revolt over its SanDisk buyout and has had the $3.8bn wad it expected from Unisplendour halted by the Committee on Foreign Investment in the United States.
Unis (Unisplendour) is a Chinese corporation, owned by the Tsinghua Unigroup, that proposed to invest $3.8bn in WD thus getting a 15 per cent stake in the business. This became public in September last year.
The two are setting up a joint venture to sell WD Active Archive products in China. This remains on track to become operational by the second calendar quarter of 2016, pending regulatory approvals.
That money would have helped WD buy SanDisk for $19bn, with WD paying $85.10 per share in cash and 0.0176 shares of Western Digital common stock per share of SanDisk common stock.
WD now intends to buy SanDisk by paying $67.50 cash for each SanDisk share plus 0.2387 of a Western Digital share.
So the cash component has reduced from $85/share to $67.50/share while the WD share consideration has increased from 0.0176 to 0.2387, a massive 1,256 per cent rise.
WD CEO Steve Milligan said: "We continue to look forward to our transformational combination with SanDisk and capitalising on the growth opportunities ahead of us as the demand for data storage continues to increase, despite the inability to carry out the equity investment by Unis. We believe the strategic rationale for this acquisition is even more compelling today than when we first announced it in October last year given industry trends and strong execution by both companies.”
That view is diametrically opposed by Alken Asset Management, which holds more than five million WD shares. It has written to WD’s board saying it is “gravely concerned about the SanDisk acquisition.” This is because “ the price has proven to be simply too high.” Investors generally agree because “Western Digital's stock price, as of Friday (19 Feb), has declined more than 40 per cent since the deal was announced.”
Breaking up is hard to do. Take $185m as consolation
We therefore intend to vote against the NASDAQ Stock Issuance Proposal at the forthcoming Special Meeting, scheduled to be held on March 15, 2015, and urge you to reconsider and cancel the SanDisk transaction.
Such a cancellation would incur a $185m fee payable to SanDisk: “A relatively small breakup fee. We would certainly support such an action.”
The main reasons it has for opposing the deal are these:
- Intel’s NAND plans at its Dalian fab will increase competition in the NAND market
- The Tsinghua Unigroup plans to build a NAND fab will increase long term supply and competition
- Toshiba’s financial problems could pose a threat to its ability to adequately finance the NAND operations depended upon by its JV with SanDisk
In AAM’s view: “The market now expects the NAND market to be more competitive – and profit more elusive – than at the time the Transaction was originally negotiated. In our view, this change in market dynamics means the price negotiated for SanDisk is significantly too high.”
It emphasises that SanDisk "specifically has suffered significant business challenges recently."
There are further aspects of the deal that AAM doesn’t like, such as WD overstating the synergy benefits and its financial advisors with incentives causing a conflict of interest and casting doubt in what they calculated to be a fair price for the acquisition.
It repeats its view that the deal should be killed:
We urge the Board to consider any and all approaches to cancelling the transaction. … Accordingly, we intend to vote against the transaction by rejecting Proposal 1 at the Special Meeting of Shareholders to be held on March 15, 2015.
That’s five-million-plus shares speaking with what looks like a devastating analysis of the deal and its drawbacks.
Stifel MD Aaron Rakers told subscribers “Western Digital’s press release highlights the company’s optimism over the combined acquisition with an ongoing emphasis on the enterprise SSD market – one of the key points in Alken’s letter to Western Digital yesterday in which it argues that Western Digital is paying a significant premium on non-strategic assets (i.e., non-enterprise accounting for more than 85 per cent of SanDisk’s total 2015 revenue).”
WD in its statement added this thought: ”Western Digital maintains an open dialogue with its shareholders and looks forward to continued engagement with them.”
It sure looks like it’s going to be a most engaging engagement. ®