Intel nears $11 billion deal with Apollo for Ireland factory, WSJ reports

[Daniel Nenni]

FILE PHOTO: Illustration shows Intel logo

(Reuters) -Intel is in advanced talks for a deal with Apollo Global Management in which the equity firm would provide more than $11 billion to build a facility in Ireland, the Wall Street Journal reported on Monday.

The move comes as Intel looks to expand its presence across the United States with a planned $100-billion spending spree across four states, to boost its manufacturing business and catch up with chipmaking rival TSMC.

Intel and Apollo are in exclusive talks for the deal, which could be signed in the coming weeks, the report said, citing people familiar with the matter.
Other investment firms including KKR and infrastructure investor Stonepeak were also in the running before Apollo recently pulled ahead, the report added.
Apollo Global Management and Intel declined to comment when contacted by Reuters.

Intel forecast second-quarter revenue and profit below market estimates last month as it faces weak demand for its traditional data center and personal computing chips, amid a surging market for AI components.

The company announced plans in 2022 to build chip factories in Ireland and France as it seeks to benefit from easier European Commission funding rules and subsidies.

Here's What We Like About Apollo Global Management's (NYSE:APO) Upcoming Dividend

Apollo Global Management, Inc. ( NYSE:APO ) is about to trade ex-dividend in the next 3 days. The ex-dividend date is...

www.yahoo.com

 

[Mooredaddy]

Mortgaging the future. Hard to see how this doesn't kneecap intel in the future. P/E firms will extract their pound of flesh

 

[Daniel Nenni]

I'm not a financial person but do wonder why Intel is doing this. Is the money cheaper? Or is Intel worried about cash flow?

 

[Mooredaddy]

I'm not a financial person but do wonder why Intel is doing this. Is the money cheaper? Or is Intel worried about cash flow?

I dont think they afford to build all these fabs actually. They are effectively selling the rights to future profits in order to build these sites out. I believe the previous brookfield deal was for 49% of future profits or something like that.

 

[osnium]

I dont think they afford to build all these fabs actually. They are effectively selling the rights to future profits in order to build these sites out. I believe the previous brookfield deal was for 49% of future profits or something like that.

What do you think Intel should be doing? Do you think that given the precarious financial situation and technology challenges, Intel should have just pulled the plug on manufacturing in 2020-2021 and let the experts handle it?

 

[blueone]

I'm not a financial person but do wonder why Intel is doing this. Is the money cheaper? Or is Intel worried about cash flow?

Intel is using a very interesting financial strategy to finance an expensive fab build-out, while maintaining free cash flow and ability to directly borrow for product development purposes, and getting access to funds below Intel's cost of equity. This was the announcement from the Brookfield deal:

Intel Introduces First-of-its-Kind Semiconductor Co-Investment Program

Intel signs agreement with Brookfield to jointly invest up to $30 billion in leading-edge chip factories in Arizona.

www.intel.com

The Apollo deal is similar.

Gelsinger, the BoD, and Zinsner really are betting the company on being a foundry. I think these deals are a financially innovative way of spreading the risk while maintaining Intel's financial position. This is, IMO, really what betting the company means, rather than just a slogan. If IFS doesn't produce successful results, meaning IFS does not achieve significant market share and a net profitable business, it'll be the end of Intel as we know it, and every leader involved will be in a Wall Street doghouse.

 

[tooLongInEDA]

I'm not a financial person but do wonder why Intel is doing this. Is the money cheaper? Or is Intel worried about cash flow?

Well, the only way the money could be cheaper from PE funding is if they can offset their debts (the bank loans raised to fund the venture) against the profits. Which they always do. As well as paying themselves huge fees. In other words, the "cheaper money" is a result of lower taxes on the share of the profits funnelled through the PE structures.

You might, if you were cynical, say that amounts to deliberate tax avoidance by Intel, whilst also hiding behind PE so they can keep their reported after profit taxes at around 20%.

Unfortunately, they would be doing this at the same time that they're begging for subsidies from the governments whose tax takes they are about to slash.

The other aspect to this is that the PE side of this will almost certainly not be taking an equal share of the risk.

Financial engineering at its finest.

 

[Mooredaddy]

What do you think Intel should be doing? Do you think that given the precarious financial situation and technology challenges, Intel should have just pulled the plug on manufacturing in 2020-2021 and let the experts handle it?

Not sure. Its a very tough position but this just reeks of abject desperation. Intel already has a inferior cost structure to TSMC and this will just make it worse as any profits it can potentially squeeze out of these projects will be cut in half

 

[blueone]

And don't forget, Intel has also raised funds by spinning out Mobileye and Altera.

 

[blueone]

Well, the only way the money could be cheaper from PE funding is if they can offset their debts (the bank loans raised to fund the venture) against the profits. Which they always do. As well as paying themselves huge fees. In other words, the "cheaper money" is a result of lower taxes on the share of the profits funneled through the PE structures.

You might, if you were cynical, say that amounts to deliberate tax avoidance by Intel, whilst also hiding behind PE so they can keep their reported after profit taxes at around 20%.

Not only is it cynical, it's not correct. Intel is essentially selling assets to PE firms because the PE firms are willing to invest, they have access to cheaper funding than Intel does, and this strategy improves Intel's flexibility in operations, project funding, and future transactions. The PE firms do it because they think Intel has a good chance of succeeding. Brookfield and Apollo may be taking more risk in your estimation than in theirs, but that's what PE firms do, take calculated risks for above-average returns.

The real challenge is, we can't assess the realistic probability of IFS success without insider information, which we don't have. I suspect, though I don't know, that the PE firms invested only with due diligence that required corporate and personal NDAs.

 

[hist78]

Not sure. Its a very tough position but this just reeks of abject desperation. Intel already has a inferior cost structure to TSMC and this will just make it worse as any profits it can potentially squeeze out of these projects will be cut in half

Well, the only way the money could be cheaper from PE funding is if they can offset their debts (the bank loans raised to fund the venture) against the profits. Which they always do. As well as paying themselves huge fees. In other words, the "cheaper money" is a result of lower taxes on the share of the profits funnelled through the PE structures.

You might, if you were cynical, say that amounts to deliberate tax avoidance by Intel, whilst also hiding behind PE so they can keep their reported after profit taxes at around 20%.

Unfortunately, they would be doing this at the same time that they're begging for subsidies from the governments whose tax takes they are about to slash.

The other aspect to this is that the PE side of this will almost certainly not be taking an equal share of the risk.

Financial engineering at its finest.

If this deal is similar to the Intel/Brookfield's arrangement, it will be counted as a debt (not the additional capital from shareholders) on Intel's accounting book because Intel guaranteed a certain level of investment return to Brookfield (or Apollo). It's an expensive way to acquire capital.

Additionally, Intel must have made promises to Brookfield (or Apollo) of certain level of fab utilization, cost structure, operation rules, and profitability of the fabs they were involved. It takes away a lot of flexibility and competitiveness from the Intel Foundry and Intel Product (design) divisions.

It's a sad situation. Not too long ago, Intel can raise $11 billion additional capital in a quick and much cheaper way.

 

[tooLongInEDA]

Not only is it cynical, it's not correct. Intel is essentially selling assets to PE firms because the PE firms are willing to invest, they have access to cheaper funding than Intel does, and this strategy improves Intel's flexibility in operations, project funding, and future transactions. The PE firms do it because they think Intel has a good chance of succeeding. Brookfield and Apollo may be taking more risk in your estimation than in theirs, but that's what PE firms do, take calculated risks for above-average returns.

The real challenge is, we can't assess the realistic probability of IFS success without insider information, which we don't have. I suspect, though I don't know, that the PE firms invested only with due diligence that required corporate and personal NDAs.

The PE firms aren't typically putting up much - if any - of their own money. It's borrowed from banks/shadow banks/etc - often against the assets (in this case I assume the fabs/fab equipment). The downside risk is typically very limited for them. They take their big fees regardless.

 

[jorgequinonez]

Apollo and Brookfield sound like cpu code-names.

 

[VCT]

Every financial deal that you can not figure out it's fair or not within 1min. I guarantee it's in favor of financial institution.

 

[hist78]

The PE firms aren't typically putting up much - if any - of their own money. It's borrowed from banks/shadow banks/etc - often against the assets (in this case I assume the fabs/fab equipment). The downside risk is typically very limited for them. They take their big fees regardless.

Intel calls this Sale-Leaseback scheme as part of its "Smart Capital" practice. It's a very expensive (in terms of cost and operations) arrangement. For example, Brookfield and Apollo definitely want to recover their investment and earn decent amount of profit (against the high risks) from the deals over five or eight years. After that, it may be difficult to sell the fab to someone else or even Intel because the fast changing of the semiconductor market.

 

[blueone]

The PE firms aren't typically putting up much - if any - of their own money. It's borrowed from banks/shadow banks/etc - often against the assets (in this case I assume the fabs/fab equipment). The downside risk is typically very limited for them. They take their big fees regardless.

Private equity funds come from institutional and individual investors.

As for fees, there's no evidence that Brookfield is charging fees for this transaction. Nor with Apollo. This is an investment deal, between two primary participants. The only question is whether Intel is overpaying for the funding by giving the PE firms what are really low prices for the assets they're purchasing an interest in. I suspect both Brookfield and Apollo got very favorable deals, or they would have not have invested in what is, overall, a very grandiose objective (IFS success) with substantial risk.

 

[blueone]

I guarantee it's in favor of financial institution.

I agree. Otherwise they would not sign up and hand over billions.

 

[hist78]

Every financial deal that you can not figure out it's fair or not within 1min. I guarantee it's in favor of financial institution.

During one of the quarterly earnings conference calls, TSMC CFO Wendell Huang was asked by an analysist if TSMC ever considered Intel/Brookfield type of deals. Mr. Huang replied that TSMC did take a look on it but found out it's too expensive to utilize it.

 

[blueone]

If this deal is similar to the Intel/Brookfield's arrangement, it will be counted as a debt (not the additional capital from shareholders) on Intel's accounting book because Intel guaranteed a certain level of investment return to Brookfield (or Apollo).

The deal is for joint ownership. Brookfield's investment does not show up as debt. Who told you that it does? Debt refers to loans or selling debt instruments, like bonds.

It's an expensive way to acquire capital.

I agree, but this is probably overall the least expensive option for funding the IFS build-out they could find.

 

[Daniel Nenni]

Well, Pat did say Intel was all-in...

I think Intel opening up the fabs for foundry business is a sound strategy. It is a marathon though, not a sprint. Unfortunately the financial types are more of sprinters which tells you that Pat Gelsinger is a very persuasive leader!