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International Regulators are Likely to Clear Applied Materials-Tokyo Electron Deal

Stocks in this article: AMAT

NEW YORK (The Deal) -- The proxy for Applied Materials (AMAT) $2.6 billion acquisition of Tokyo Electron has cleared but antitrust regulators in a number of jurisdictions are still looking at the semiconductor combination.

The proxy cleared the Securities and Exchange Commission Wednesday and a Applied Materials shareholder vote for the merger is set for June 23. The merger requires the approval of the shareholders of both companies and Tokyo Electron's shareholder vote is June 20.

The deal remains under review by the U.S. Department of Justice; the Ministry of Commerce in the People's Republic of China, the German Federal Cartel Office, South Korea's competition regulators and the Japanese Federal Trade Commission.

It seems that the resolution of all of the regulatory reviews could converge on the end of July or beginning of August.

China's MofCom accepted the merger filing Jan. 26 and the review is approaching the end of its 90-day, second phase. Assuming a standard 180-day review, without further extensions, the MofCom process could end near the end of July.

The deal was pushed into a second phase in Germany, which also could reach a conclusion near the close of July, but is expected to require divestitures.

The DOJ issued a second request Dec. 12, a review that is ongoing, which is also expected to require some divestitures.

The merger received clearance from the Committee on Foreign Investment in the U.S. in late February. The deal is subject to filing with the Minister of Finance in Japan, which has similar national security oversight as CFIUS, but the merger close is not conditioned on receipt of that approval.

The deal did get kicked into a secondary review by the Japanese Fair Trade Commission on April 11. That review process has a 90-day time frame but the clock does not start ticking until the companies are deemed in compliance with the information request, an antitrust attorney said. Nevertheless, most merger cases under the JFTC are completed within a two- to three-month time frame, the attorney said. That would also suggest the merger could receive approval by the JFTC by late July or early August.

The deal is subject to antitrust approvals in other jurisdictions, including, South Korea, which could affect the ultimate timing of a deal close.

The drop-dead date for the deal is Sept. 24, one year from the merger announcement.

The companies have overlaps in etch product lines, but are not the dominant player in that area of semiconductor manufacture. The primary concerns are in the area of deposition, processes for layering film on a wafer. Deposition itself is broken down into various processes. The segments thought to present the greatest overlap between Tokyo Electron and Applied Materials in deposition are dielectric, and electrochemical. In each of these segments of the deposition category, Applied Materials is considered a market leader and is expected to have shares in excess of 40% in these segments after the merger. Applied Materials currently controls about 47% of the total deposition market. Tokyo Electron has about a 12% share of the total space with overlaps in each of the sub-segments.

According to one risk arbitrage source, even with leading positions in dielectric and electrochemical, Applied Materials can gain antitrust approval for the deal by divesting $175 million in revenue in the product overlap categories, which falls well under the divestiture cap in the merger agreement of $600 million of revenue based on fiscal 2012 results for both companies.

The spread Wednesday was roughly 90 cents, or 6.2%, which translates to an annualized return of about 28% if the merger closes Aug. 1.

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