May 11 - Standard & Poor’s Rating Services announced today that Micron Technology Inc.’s (rated ‘BB-’ with a negative outlook) negotiation to acquire Elpida Memory Inc.’s business from Court-appointed trustees does not have an immediate impact on our ratings on the company, due to the numerous uncertainties related to the potential transaction. These uncertainties include timing, ultimate success, costs, structure and funding sources, as well as visibility into Elpida’s performance and investment requirements. Partially offsetting these concerns, Micron does have flexibility within its current rating, including debt capacity, approximately $3 billion of pro forma cash, and prospects for an earnings recovery over the coming year. In addition, if successful, the combination could enhance Micron’s position in the DRAM and the overall memory market.
To date, neither Micron nor the office of Elpida’s trustees has announced potential consideration which could be paid for the acquisition, though the media has reported amounts in excess of $2.5 billion. In addition, Micron’s capital expenditures to integrate Elpida’s capacity could be an incremental cost, offset over time by potential capital expenditure and other synergies, as well as mobile DRAM business growth. We note that Micron’s capital expenditures amounted to over 20% of revenue in the March quarter and, according to DRAMExchange, its pro forma revenue share of the mobile DRAM market with Elpida would increase to 13% from 4% at present on a stand-alone basis.
In our research update on Micron dated April 12, 2012, Standard & Poor’s noted that our ‘BB-’ rating on Micron and our negative rating outlook reflect current weak memory market conditions, near-term potential acquisition spending in support of industry consolidation, and increased leverage. Micron’s negotiations to acquire Elpida are a demonstration of its continued participation in semiconductor memory industry consolidation.
If Micron’s acquisition spending and acquisition integration costs increase such that leverage approaches 3x or more, we could lower the ratings. We note that Micron has some room within its rating for additional leverage, considering that its debt to EBITDA represented 1.8x at March, pro forma for $870 million senior convertible notes issued in April, the proceeds of which have bolstered liquidity and could be used to help fund the Elpida acquisition. Micron’s liquidity amounts to about $3 billion, with about $2 billion in cash as of March 2012 and the $870 million April convertible notes issuance.
Micron’s EBITDA has declined over 30% year over year to $2.1 billion for the 12 months ended March 2012. We expect EBITDA to remain at this level for fiscal 2012 and to recover much of the decline in fiscal 2013, supported by solid state drive (SSD) spending, DRAM sector consolidation, recovery of the hard-disk drive sector, and industry inventory replacement.