Tokyo Electron Arbitrage Spread Wide on Possible S. Korea Delay

The outlook for Applied Materials Inc.'s (AMAT) $12 billion acquisition of Tokyo Electron Ltd. (8035) seems to still lean toward an eventual approval but the arbitrage spread remains wide.

That spread, about $1.80, or 10%, Monday trended in from about $2 on a report that the deal looks likely to clear its review in South Korea, even though the time line for that approval was said to be a spring date.

More importantly, the review of the deal with the Department of Justice in the U.S. has reached a stage of that agency vetting a buyer of assets to be divested to get the deal done, a source said.

The report out of South Korea by the Korea Times suggested that Samsung Electronics was opposing the transaction but has altered its stance after reaching an agreement with Applied Materials regarding collaboration on next generation chip designs. Korea is now likely to approve the transaction, but possibly not until March or April, according to that report.

The companies have been targeting a close by the end of 2014, but last month allowed that the regulatory reviews could slip into 2015.

The antitrust review by the Ministry of Commerce of the People's Republic of China under a standard timetable could end at the close of January, considering an accepted application in late July. The companies refiled for that review on July 28.

The U.S. Department of Justice issued a second request issued last Dec. 13.

One source said that the DOJ was reviewing a buyer of assets to be divested for the approval and that the DOJ required a "fix-it-first".

The DOJ declined to comment. Applied Materials did not return calls.

The notion that regulators are reviewing a divestiture package is a positive for the spread, which has been buffeted by reports that competitors or customers have raised obstacles to the combination of the manufacturers of tools for fashioning semiconductors.

If a package is being vetted, then it stands to reason that the requirement of the DOJ or MofCom have been at least addressed, if not fully resolved.

One arb said that Intel Corp. (INTC) had issues because it had servicing for its Tokyo Electron product without cost, while Applied Materials charged for like services. Intel, the arb said, has assurances that it will continue to receive servicing for Tokyo product for a specified period and the chip-maker has lightened opposition to the merger.

While the notion that South Korea could review the deal until the spring is not refreshing, that Samsung has also been brought on board is sign that the deal is moving forward.

The transaction also needs approval in Japan.

The approval by the German Federal Cartel Office stated that a great many complex markets were analyzed without raising issues that jurisdiction, in part because the large chip-makers wield too much power for a combined Applied-Tokyo to raise prices.

If the merger can close by the end of January, the spread represents an annualized return of about 60%.

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