Abu Dhabi deal could cost AMD millions

Dubai: This week's restructuring of a deal between Advanced Micro Devices (AMD), the world's second-largest maker of computer microprocessors, and two Abu Dhabi-based companies, may cost AMD millions in needed cash, but isn't likely to have an immediate impact on AMD's financial performance, according to a US-based analyst.

According to Bill McClean, president of IC Insights, which has covered the semiconductor industry for almost 30 years, the deal still allows AMD to hand over its manufacturing facilities to a joint venture, tentatively called the Foundry Company, between AMD and Advanced Technology Investment Company (ATIC), which is owned by the Abu Dhabi government.

McClean said the deal with ATIC would provide the biggest relief to AMD, since the chipmakers had to pay $6.3 billion in capital expenditures over the last five years, and the ability to hand those operations over to a new company would allow AMD to continue to conduct research and make improvements to the existing plants. "AMD does need some cash, but a big part of it is getting out from under those facilities," he said.

In October, Mubadala Development Company agreed to purchase 58 million shares of AMD for $314 million (Dh1.15 billion), which would give the government-owned company 19.3 per cent ownership of AMD and a seat on the company's board of directors.

Stock

AMD's stock at the times as $4.59 a share, but since then the stock has dropped to around, and at times below, $2 a share.

Under the new terms of the deal announced this week, Mubadala has agreed to pay AMD the stock's 20-day average ending on December 12.

On Wednesday, the average, according to Gulf News calculations, was $2.185. Provided that average stays the same, Mubadala would only pay AMD $128 million, a difference of $188 million from the original deal.

Both AMD and Mubadala have confirmed to Gulf News that terms in the restructured deal allow Mub-adala to re-evaluate the purchase price of the stock again before deal is finalised, which is estimated to occur in early 2009.

However, if AMD's stock continued to fall, the value of the deal could drop to a point that is unfeasible for the chipmaker, McClean said, although no one is estimating just how low is too low.

AMD's stock has drop-ped 48 per cent since the deal in October, and 75 percent over the last year.

Originally, AMD promoted the deal with Mubadala as one that would make the company financially stronger, and Emilio Ghilardi, the company's vice president for Europe, Middle East and Africa told Gulf News two months ago that the deal meant that AMD would not face any liquidity issues during the current financial crisis. The chip manufacturer has struggled with cash flow problems since its acquisition of ATI, a producer of video graphics cards, in 2006. Prior to last quarter, AMD had posted seven consecutive quarterly losses.

Gary Silcott, a spokesperson located in AMD's offices in Austin, Texas, said the company would not comment on the impact of the deal until it had released the next quarter's financial results.

Silcott called the company's current stock performance "the result of the challenging economic times we face."

He said the deals with Mubadala and ATIC were still "transformational" for the company, and the companies "were still on track" to finalise the deals in early 2009. "We still believe it's a great opportunity. It's a long-term strategy, and that's how it should be viewed." He added that AMD would come out of the down cycle "just like we have before."

Khaldoon Al Mubarak, CEO and managing director of Mubadala, said in an e-mailed statement to Gulf News, that the company "is a patient, long-term investor and continues to believe in AMD's potential and business plan. In what are challenging times for every company, Mubadala continues to assess its holdings and transactions and, where appropriate, to seek new terms that reflect current market conditions."

AMD's deal with ATIC has also been restructured. The two companies agreed to form the Foundry in October, but ATIC will now control 65.8 per cent of the company, up from the 55.6 that was originally announced. AMD will still receive $700 million from ATIC for the deal, and both companies will have equal voting rights after the deal is finalised.

Waleed Al Mokarrab, chairman of ATIC, said in an e-mail that "ATIC's view of the foundry business is the same as when we first announced the transaction in October - there is a strong, long-term demand for independent leading edge semiconductor manufacturing. We continue to work toward closing the deal early next year and, consistent with our agreement, to have the new Foundry Company move forward with new and upgraded manufacturing facilities in New York State and Dresden Germany."

McClean said AMD's reducing their share in the Foundry of the deal was probably happily accepted by the company, and he would be surprised if the company didn't further reduce its stake in The Foundry at a later date.

However, McClean doesn't think that Foundry, which will make AMD's chips as well as those of other companies, will allow AMD to grab more market share from rival chip maker Intel, due to that company's continuing dominance of the industry. He predicted that even five years from now, AMD is likely to be only a niche player.