MagnaChip[MX] : recently terminated merger agreement presents a special situation
"If the world were perfect, it wouldn’t be." -Yogi Berra
The recent termination of the merger agreement between Wise Road Capital and MagnaChip (Symbol: MX) presents an attractive, high-risk, opportunity for investors.
Here is the recent news [ source ]
Magnachip and Wise Road Capital Announce Withdrawal of CFIUS Filing and Mutual Termination of Merger Agreement
Dec 13, 2021
- Magnachip adopts limited-duration shareholder rights plan
SEOUL, South Korea, Dec. 13, 2021 /PRNewswire/ -- Magnachip Semiconductor Corporation ("Magnachip Corp." or the "Company") (NYSE: MX), the U.S. (Delaware) parent of Magnachip Semiconductor, Ltd., and South Dearborn Limited, a company incorporated in the Cayman Islands, and Michigan Merger Sub, Inc., a Delaware corporation, which are investment vehicles established by Wise Road Capital LTD and certain of its limited partners ("Wise Road"), today announced that they received permission from the Committee on Foreign Investment in the United States ("CFIUS") to withdraw their joint CFIUS filing in relation to their proposed transaction (the "Merger") and will be terminating their previously announced definitive merger agreement.
As a result of this deal not receiving CFIUS approval, Wise Road is paying MagnaChip a $70 million deal-break fee. The fee is roughly equivalent to $1.50 per share in cash based on the current 46.5 million shares outstanding. Before this announcement, MagnaChip had approximately $280 million in cash, or roughly $6.00 per share. After it receives the $70 million from Wise Road Capital, the company will have $350 million in cash, or $7.50 per share. MagnaChip has no debt. MagnaChip shares have recently been trading in a range of $17 to $20 awaiting news on this potential merger.
MagnaChip is a relatively small semiconductor company based in South Korea. It has a market cap of just under $900 million. Here is a recent presentation of their business from March 2021. Almost 40% of MagnChip’s market cap sits in cash. The company has no debt and generates free cash flow. The company plans to generate earnings of $1.40 per share next year. If we assign a conservative P/E multiple of 15x to those earnings, it should trade at $21.00 per share. If we add in the $7.50 per share of cash, that raises our conservative price target to $28.50 per share. At the current price of $19.00 per share, that represents 50% upside for the stock.
Company management is focused on addressing the undervalued stock price. There have been several interested parties making offers for the company, including a $35 takeout offer from Cornucopia Investment Partners that did not materialize. We think that either a U.S. based or South Korea based entity may make another attempt to purchase the company. Regardless, management is now free to pursue a capital allocation strategy that is likely to include some combination of stock buybacks and/or a special dividend.
Due to the absurd amount of cash it has in the bank, MagnaChip recently enacted a poison pill to prevent a hostile bid for the company:
Magnachip's Board of Directors (the "Board") is actively engaged in determining the best way to return and enhance value to shareholders. Accordingly, in order to allow adequate time to evaluate all options, the Board has adopted a limited-duration shareholder rights plan (the "Rights Plan") and declared a distribution of one right ("Right") for each outstanding share of common stock. The Rights Plan is effective immediately and will expire on December 12, 2022, unless earlier redeemed, exchanged or amended. The record date for the Rights distribution is December 23, 2021. The Rights will generally become exercisable only if any person or group acquires 12.5% (or 20% in the case of a passive institutional investor) or more of the Company's outstanding common stock (the "triggering percentage"). If a person or group acquires the Company's outstanding common stock in an amount above the triggering percentage, each Right will entitle its holder (other than the acquirer(s)) to purchase for $80, a number of shares of the Company's common stock having a market value of twice such price. Alternatively, in the event the Rights become exercisable, the Board may elect to exchange one share of the Company's common stock for each outstanding Right (other than Rights owned by the acquirer(s)). In addition, if the Company is acquired in a merger or other business combination transaction after a person or group acquires 12.5% (or 20% in the case of a passive institutional investor) or more of the Company's outstanding common stock, the Rights would entitle the Company's stockholders, other than the acquiror, the opportunity to purchase for each share of common stock owned, $80 worth of shares of the other party's common stock having a market value of twice such price.
We think MagnaChip is an attractive, high-risk, investment opportunity. We think the stock is attractive for purchase whenever MX shares trade below $20 per share and especially during periods of market weakness when shares trade into the $17s. In our view two possible scenarios could play out for this company:
another bidder for the company emerges around the $29 to $35 bid range as seen earlier this year
the company institutes an aggressive buyback/dividend strategy that could see them repurchase 20% or more of their shares via a tender offer using cash on the balance sheet.
On January 6th, 2022 MagnaChip management will conduct a conference call with investors to discuss their capital allocation plans. Tune in to hear what opportunities exist for this promising company.
If you want to read more about the company, here is a Value Investors Club writeup of MagnaChip from August 2021, and here is a SeekingAlpha writeup from December 2021 that details the current special situation.
Fair Warning: MagnaChip stock is a very volatile South Korean company that operates in the extremely volatile semiconductor sector. If price volatility bothers you, you will not enjoy owning this security. This stock pick is best suited for investors seeking a high-risk investment opportunity.