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TheStreet Open House

Micron Becomes a Major Apple Supplier With $2.5 Billion Deal

Stock quotes in this article: MU, AAPL

Updated to reflect analyst comments and additional data

NEW YORK ( TheStreet) -- Micron (MU) is buying bankrupt Japanese chip maker Elpida for $750 million in cash and $1.75 billion in future installment payments, according to a company statement released Monday.

In a separate move, Micron also said on Monday that it would buy a 24% stake in Taiwanese chip maker Rexchip Electronics for roughly $334 million from Powerchip Technology Corporation, adding to the 65% stake in the company that Elpida owns and putting its share ownership at 89%.

By adding Elpida and Rexchip's manufacturing capabilities Micron will roughly double its capacity to make DRAM memory chips, which are a key component of smartphones and mobile devices, and become a supplier to Apple (AAPL).

In the deal to buy Elpida, which could total $2.5 billion, Micron will pay $750 million in cash for the Japanese chip maker and it will make $1.75 billion in total annual installment payments through 2019 from cash flow generated by newly acquired Elpida operations. As part of the agreement, which was inked in a Tokyo court, Elpida will extinguish its pre-bankruptcy debt and use proceeds from the Micron sale to repay creditors.

For Micron, the long-speculated acquisition pushes it further into manufacturing memory chips for consumer electronics such as smartphones and tablets. While Micron is a leader in fabricating DRAM solutions for networking and servers that are used by large businesses, Elpida has a strong presence in consumer-oriented hardware.

With Elpida, a supplier for smartphone and tablet makers like Apple (AAPL), Micron will roughly double its market share of DRAM memory chips, putting its global market share at nearly 25%. The move may also help Micron avert recent industry memory chip price declines.

"Terms of the deal are attractive, as we believe Elpida and Rexchip provide Micron with considerable manufacturing scale and R&D synergies," wrote RBC Capital Markets research analyst Doug Freedman in a note to clients reacting to the deal, who cites bolstered cash flow and a recent uptrend in DRAM pricing as other highlights to the deal.

Micron has posted losses in the past four quarters on pricing pressures and flat revenue. In Monday trading, the company's shares rose over 4% to $6.61.

"We are creating the industry-leading pure-play memory company," said Micron chief executive Mark Durcan, in a statement. "Today's transactions will help strengthen the combined companies' market position in the memory industry through increased research and development and manufacturing scale; improved access to core memory market segments; and additional wafer capacity to balance among DRAM, NAND and NOR memory solutions."

The consolidation will give Micron a chip fabrication plant in Japan, a Rexchip plant in Taiwan and other assembly and R&D facilities, in a move that will scale the Boise, Idaho tech company's chip making operations. Overall, Micron expects that the deal will add to earnings per share in the first year after the acquisition closes, which is expected in 2013.

In late 2011, Micron had been reported to consider a multi-billion bid for Elpida prior to its bankruptcy; however a deal never emerged. In early February, former Micron CEO and chairman Steve Appleton died in a plane in a plane crash. Later that month, Elpida filed for bankruptcy.

-- Written by Antoine Gara in New York.

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