Some companies try to keep their share prices up with buybacks. Others go down the route of debt-fuelled acquisitions. Entegris chose the latter course. The semiconductor chemicals company will buy out rival CMC Materials for $6.5bn. Entegris must feel confident. A 50 per cent surge in its stock price this year has given it an enterprise value of $20bn.
Customers such as Taiwan Semiconductor Manufacturing are better known than either business. It generates a tenth of Entegris’s revenue. The chemicals groups provide materials essential for embedding transistors on to silicon wafers. The process is technically complex.
As chipmakers consolidate to build up scale, suppliers must expand to keep up. Demand for microprocessors is brisk, thanks to shortages and an insatiable global appetite for memory.
CMC has been having a tough year, even so. Revenue growth has been solid particularly from its core “slurry,” used to polish chips. But margins have suffered because of rising raw material and shipping costs. Its share price has slipped slightly in 2021, offering Entegris an opportunity
The deal terms reflect the bidder’s determination. Entegris’ net debt-to-ebitda ratio will soar to over four times even though a third of the consideration will be paid in stock. Entegris shares trade at a earning multiple of more than 30 times, well ahead of CMC. The buyer says it can wring out $75m of cost savings or under a tenth of CMC’s 2020 direct and operating costs.
Entegris said that while its dividend would continue, it would halt buybacks. Its shares fell 4.6 per cent. Some of that could be arb-related noise. But a big, leveraged transaction can also stoke unease among shareholders. Worries over the reaction of regulators in China and elsewhere may also have tempered any enthusiasm for the takeover.
Deals like this are one of the ways chief executives earn their pay. It is up to them to take calculated strategic risks when conditions are favourable. Entegris boss Bertrand Loy is taking a chance near the top of the asset cycle. But the chips business has secular oomph behind it too.
