The spread for the $17.2 billion merger of SanDisk (SNDK) and Western Digital (WDC - Get Report) has widened over concerns regarding national security reviews, although it still is uncertain the SanDisk transaction requires such a review.
But the time seems to have run out for the national security review of a secondary transaction to the SanDisk merger.
Western Digital announced its merger with data storage peer SanDisk on Oct. 14. The terms of the deal offer $85.10 in cash and 0.0176 of a Western Digital share if a previous equity investment in Western Digital closes. That investment is a $3.78 billion share purchase by Unisplendour, a Chinese company controlled by Tsinghua University and by extension the government of China.
The SanDisk merger is not conditioned on the close of the Unis investment, but proceeds of the Unis investment will be used to finance some of the cash in the SanDisk deal. So if the Unis investment, which is subject to review by the Committee on Foreign Investment in the U.S., does not close, the terms of the SanDisk merger shift to less cash and more Western Digital shares.
Cfius is a Treasury Department-chaired committee that reviews foreign acquisitions of U.S. assets that could result in national security risk.
The Unis deal was announced Sept. 30 and will increase Unis' stake in Western Digital from 5% to 15%. The transaction gives Unis a seat on Western Digital's board as long as Unis holds over 5% of Western Digital. Western Digital said it structured the deal to appease Cfius. Under the purchase agreement, Unis is required to vote its shares along with the recommendation of the Western Digital board. Unis' board member would be restricted from discussions involving U.S. government contracts. And the 15% stake falls below a level of control. Unis is restricted under the purchase agreement from buying more shares for five years.
Assuming the Unis purchase goes through, Unis would be diluted to about a 12% holding in the merged company. Western Digital expects all of its board members to become board members of the combined company.
Although Western Digital said it did not expect the Unis sale to require a Cfius review, it made an application sometime prior to Oct. 29. That would mean the full 90 day review process for the Unis transaction would have ended prior to Monday, but there has been no word of a conclusion. It would seem that Western Digital refiled for the Cfius review, which could be raising concerns among arbs.
It is not clear that a Cfius review of the SanDisk deal will be required and it does not seem that any filing has been made for the merger, an arb said. Another arb said there has been no chatter of concern about a Cfius review for SanDisk. Both SanDisk and Western Digital are U.S. companies, so any Cfius review would only extend to the Unis holding in the combined entity.
That issue will be resolved by the Cfius review of the Unis transaction, so it seems unlikely Cfius would require then another review, especially when the Unis holding would only be reduced by the merger and Western Digital would have satisfied Cfius concerns. It is more likely that Unis either doesn't pose a concern in the end, or is not allowed. The Unis termination terms are not public.
Western Digital did not return calls for comment.
If the Unis transaction does not close, the terms of the deal become $67.50 in cash and 0.2387 of a Western Digital share. Under that scenario, because Western Digital would be issuing more equity, the merger would require approval by Western Digital shareholders, as well. Under those terms the deal value Tuesday was $78.35 and the spread $14.35, or 22%, as opposed to $85.90 and a spread of $21.90, or 34%. SanDisk share were down about $5.70, or 8.4%, at $61.75. Because of the uncertainty of the final terms, the deal presents a difficult hedge.
A Western Digital shareholder approval adds some risk to the transaction. Western Digital shares have declined 48% since the October merger announcement and closed Tuesday at $45.34.