A recent story said that Qualcomm Inc. had talked to Intel Corp. about a possible takeover. This has made equity analysts doubt the benefits of a Qualcomm Inc. and Intel Corp. merger.
Concerns about a deal were echoed by credit analyst Dave Novosel of Gimme Credit on Wednesday. He said that the deal would probably need a mix of stock and debt, which would put Qualcomm QCOM 0.51%’s leverage in the same category as junk bonds.
FactSet says that Qualcomm has more than $14 billion in bonds that are still outstanding. These bonds have an A grade from S&P Global Ratings. Intel INTC 3.38% has more than $50 billion worth of debt rated at BBB+. This is after it was downgraded in August because of worries about slow growth in the near future and growing costs.
Novosel wrote that a large share of stock would cause shareholders’ value to drop significantly. A downgrade to trash would make Qualcomm’s interest rates go up and keep it from getting investments from pension funds and other groups that can only put money into investment-grade debt.
Novosel began to cover Qualcomm’s bonds with a sell rating, pointing out that the company’s 2033 notes are trading with a 50 basis point yield spread over Treasurys.
“Even though we don’t think the end of an Intel deal is
“It’s likely, and we’re worried that Qualcomm would think about doing something like that,” the expert wrote. “Its reliance on Apple is another worry.”
The Wall Street Journal wrote about Qualcomm’s offer to buy the company on Friday, but Intel didn’t want to comment. Qualcomm also didn’t respond to a MarketWatch request for comment.
Novosel saw some good things about the deal, like Intel’s strength in PCs and servers for data centers, which would go well with Qualcomm’s mix of smartphone business, since phones bring in more than 70% of the total income.
“It would make Qualcomm less dependent on Apple AAPL -0.92% for a big chunk of its income,” he wrote. “On top of the income synergies we
would expect a deal to have real cost savings, especially when it comes to administrative tasks.
His writing showed that Intel’s market value has dropped to only half that of Qualcomm because its stock price has dropped 52% so far this year.
“But it’s likely that any bid would come with a takeover premium,”
Novosel said, “Bringing the value to more than $100 billion.” This will require a lot of debt and stock to pull off.
Intel already has a lot of debt because it invested money to pay for the growth of its factories. Ebitda, which stands for earnings before interest, taxes, depreciation, and amortization, has been hurt by falling revenue and running losses in the foundry business. Ebitda is often used to figure out how well a company can pay its interest costs.
“Intel has had negative operating income in eight of the last nine quarters, partly due to the ramping up of new products,” the analyst said. “Buying Intel would crush Qualcomm’s margins.” “Of course, that run of losses isn’t going to last much longer.” Also, because Intel is spending so much on capital, free cash flow is expected to go negative when Intel is included.
Like stock experts, Novosel doesn’t think Qualcomm will be very interested in the foundry business since Qualcomm gets most of its chips from Taiwan Semiconductor 2330 1.82% and Samsung 005930 -1.58%.
But it would be hard to spin it off while the unit is still losing a lot of money, and the U.S. government might not like it because Intel got money to boost chip production in the U.S.
Because of how big and important both businesses are, regulators will also be very interested in Qualcomm. A lot of big chip deals have been turned down, like Broadcom’s AVGO -0.15% plan to buy Qualcomm and Qualcomm’s plan to buy NXP NXPI -0.08%.
“We believe that it would be better for Qualcomm to go after specific parts of Intel instead of the whole company.” The story said, “Unfortunately, the most appealing units would be the ones that Intel is counting on to bring in growth.”
The bond market may not be sure about a deal either, as these charts from BondCliQ Media Services, a company that provides data solutions, show.
Since the WSJ story, both names have seen net selling. Intel is the more liquid name, so it has seen the most net selling.
Spreads, meanwhile, have actually tightened, although that’s more a feature of strong credit markets than enthusiasm for a deal.
The next chart shows that Intel has nearly three times as many bonds outstanding as Qualcomm.
Qualcomm’s stock is down 4% in the month to date. Intel’s stock is up 16%.
