Oct. 7 (Bloomberg) — Advanced Micro Devices Inc., the computer-chip maker struggling to compete withIntel Corp., plans to spin off its manufacturing plants as part of an $8.4 billion investment from the Abu Dhabi government.
Abu Dhabi will pay AMD $700 million for a stake in a new company that will own two plants in Germany and build another in New York. The new company, which will assume $1.2 billion of AMD’s debt, will receive as much as $6 billion from Abu Dhabi to expand the factories and get $1.4 billion in operating capital. Abu Dhabi will also pay $314 million to double its stake in AMD to 19 percent, AMD said yesterday in an e-mailed statement.
The cash infusion is a lifeline for AMD, which may report a third straight annual loss this year and is falling behind on investments needed to keep up. Intel spends more on plants and research than AMD makes in annual revenue. Abu Dhabi is building on a 2007 investment as it seeks a foothold in the technology industry.
“People thought that AMD was on the brink of bankruptcy,” said Doug Freedman, an analyst at American Technology Research in San Francisco. “It definitely pushes them far away from that.”
The new company, called Foundry Co., will make processors for AMD and seek contracts from other companies, while AMD will continue to design and market chips. That structure means AMD can develop new products without having to invest billions of dollars in plants, said AMD Chief Executive Officer Dirk Meyer, who took over as CEO in July.
“It will make AMD financially strong and more tightly focused,” Meyer, 46, said in a telephone interview.
AMD, based in Sunnyvale, California, has struggled since its founding in 1969 to keep up with Intel. AMD, now Intel’s only competitor in computer processors, has posted nine annual losses in the past 15 years and its stock has fallen 90 percent since reaching $42.10 in February 2006.
AMD lost 30 cents, or 6.6 percent, to $4.23 yesterday in New York Stock Exchange composite trading.
Advanced Technology Investment Co., a newly created arm of the Abu Dhabi government, will own about 56 percent of the manufacturing company, leaving AMD with the rest. About 3,000 of AMD’s 16,000 workers will move to Foundry Co., which will be led by AMD executive Doug Grose. AMD Chairman and former CEO Hector Ruiz will step down as a director and head the board at the new company.
The New York plant, in Saratoga County between the towns of Stillwater and Malta, will employ 1,400 people. The company will take advantage of a 2006 agreement with the state to obtain $1.2 billion in cash and other incentives.
`Very Difficult Year’
AMD ended the second quarter with about $5 billion in long- term debt and $1.57 billion in cash and equivalents. AMD’s 7.75 percent notes due in 2012 traded at 68.88 cents on the dollar yesterday, yielding 19.1 percent, according to Trace, the Financial Industry Regulatory Authority’s bond-pricing service. That’s down from 87.88 cents on the dollar at the end of last year.
The cost of protecting AMD’s debt from default has spiked this month. Contracts on AMD’s bonds jumped to 39.3 percent, from 14.5 percent on Sept. 1, CMA Datavision prices show.
Mubadala Development Co., another investment arm of Abu Dhabi headed by Khaldoon Al Mubarak, is doubling its stock interest in AMD less than a year after its initial investment, when it paid $12.70 a share, triple the stock’s closing price yesterday.
“Obviously it’s been a very difficult year from the perspective of the performance of the shares of AMD,” Mubarak said. “That aside, we totally buy into the asset-smart strategy that AMD’s pursuing. We will be able to realize the type of returns that we had always anticipated.”
Abu Dhabi, the most prominent of sovereign wealth funds, is extending its investments beyond oil and into technology, real estate and financial services. The fund has stakes in Citigroup Inc., private-equity firm Apollo Global Management LLC and luxury carmaker Ferrari SpA.
Mubadala and Advanced Technology Investment are part of the Abu Dhabi Investment Authority, the world’s biggest sovereign wealth fund, which has an estimated $1 trillion under management. Abu Dhabi is the capital of the United Arab Emirates, which also include Dubai.
AMD’s existing capital budget of $1.1 billion this year is the lowest since 2003. The company compounded its debts with the 2006 purchase of graphics chipmaker ATI Technologies Inc. The $5.4 billion transaction now dwarfs AMD’s stock value of $2.57 billion.
Santa Clara, California-based Intel will invest $11.2 billion this year in new plants, equipment, research and design, compared with the $5.92 billion analysts estimate AMD will get in revenue.
Big News: AMD to finally spin off manufacturing on Tuesday
So, if you make an announcement the night before you make an announcement about making an announcement, doesn’t that just beg the press to find out what that same announcement is early? That is what happened to the fine folks at AMD tonight when they sent out a press release about a “significant corporate announcement” tomorrow.
The big news? AMD will finally culminate their “asset light” plan by spinning off the manufacturing side of the business to a group funded by $8.4 billion dollars from Abu Dhabi. Bloomberg has the full story that talks about the various stakes and financial investments from both sides of the new investment. AMD will be paid $700 million dollars from the Abu Dhabi group and will pass on $1.2 billion dollars in AMD’s debt to form the new manufacturing company, to be known as “Foundry Co.,” that will be infused with another $6 billion to expand and operate. The new company will be responsible for making all of AMD’s CPUs but will seek contracts from other companies.
The cash infusion to AMD is a critical point here – the $700 million dollars will help get the company out of the shadow of bankruptcy and allow them to focus on making new products to compete with Intel. One question I have is how closely the two companies will cooperate on process technology and CPU technology and the marriage between them. Intel’s processor design teams seem to mix the two quite effectively – an advantage that Intel looks to continue to have over AMD.
The new AMD begins today.