The Board of Directors of Dialog Semiconductor plc (“Dialog” or “Company”) (XETRA: DLG) has reaffirmed its support for Dialog’s pending acquisition of Atmel Corporation and continues to unanimously recommend that Dialog shareholders vote in favour of the transaction at the general meeting of Dialog shareholders scheduled for November 19, 2015.
This statement is being issued in response to the Institutional Shareholder Services Inc. (“ISS”) recommendation issued on October 30.
“Our Board remains fully committed to the strategy of creating a global semiconductor leader in mobile, Internet of Things (IoT) and automotive applications. We strongly believe the acquisition of Atmel is a critical step to ensuring the successful execution of this strategy,” said Jalal Bagherli, CEO and Executive Board Member of Dialog.
The Dialog Board of Directors reconfirms its reasons to unanimously recommend this transaction, as referenced in the Offering Circular dated October 23, 2015.
Strategically important transaction
The combination of the differentiated technology portfolios is compelling and will position Dialog to gain leadership positions in markets that are expected to grow rapidly in the next several years. Dialog believes that the transaction will:
- Strengthen and diversify Dialog’s existing business with Atmel’s complementary product and technology portfolio of leading microcontroller, wireless connectivity, security and automotive solutions;
- Significantly increase Dialog’s scale and addressable market, allowing it to unlock and target the attractive IoT and automotive segments while further solidifying its leadership position in mobile and consumer markets;
- Create enhanced innovative system solutions, leveraging scale of the combined R&D and broader intellectual property portfolio;
- Enable Dialog, through Atmel’s global and proven distribution network, to diversify and cross-sell its products to more than 70,000 customers, and to sell Atmel’s products to Dialog’s existing tier 1 customers; and
- Generate significant revenue synergies through combined product offerings and achieve cost synergies through greater scale and operating efficiency.
Value accretive transaction
The Dialog Board of Directors believes this acquisition will lead to attractive financial returns for its shareholders. Dialog completed detailed financial analysis on the impact of this acquisition and concluded that the returns would be in excess of the cost of capital. Additional financial metrics that support the business case are available in its most recent transaction presentation at the below link (*): – Target long-term annual revenue growth of approximately 11-15%, significantly in excess of semiconductor industry growth;
- Target long-term operating margins of 23-25%, which is very attractive when combined with expected revenue growth;
- Illustrative 2018 Underlying EPS estimate of $5.00-$6.00 per share;
- Illustrative 2018 Underlying EBITDA of $1.0-$1.3 billion; and
- Illustrative 2018 cash flow yield (or Return on Invested Capital) of 11-13%.
Use of leverage to finance the transaction
Dialog carefully considered various funding alternatives to optimise the balance between financial returns to its shareholders and overall execution risk. Dialog believes that the relatively low cost of debt financing and the expected short paydown timeframe support its decision to utilise debt in its financing structure. The Company expects to have leverage (before considering synergies) of approximately 3x Net Debt / LTM EBITDA at closing and expects to be able to substantially repay its transaction debt within three years. The ability to quickly de-lever is based on high profitability, transaction synergies and the strong cash flow generative nature of the Company. Dialog notes that other companies in the semiconductor sector such as Avago, Intel, Lam Research and Texas Instruments have used debt as a funding source for large acquisitions and Dialog feels comfortable with this level of leverage and the paydown schedule.
Additionally, the Dialog Board of Directors wishes to clarify the following points in reference to the ISS report.
- ROIC versus cost of capital. The report states that the ROIC for the transaction is lower than Dialog’s cost of capital. However, the actual cost of capital when taking into account the transaction funding sources (debt, cash, equity) is lower than the cost of capital stated in the ISS report and lower than the expected ROIC.
- Dialog’s Q3 earnings announcement was not a “profit warning.” The report references a “profit warning” made by Dialog on October 26. However, there was no profit warning issued by the Company. Dialog’s Q3 2015 revenues were the largest Q3 revenues in its history. Revenues were within the prior guidance range and underlying gross margin was in excess of the prior guidance. In addition, Dialog provided guidance for Q4 2015 revenues implying 30-39% sequential growth versus Q3 2015 results.
- The required vote. The report suggests that the parties amended the merger agreement to remove the requirement for a 75% shareholder vote because of concerns about obtaining shareholder approval. The 75% vote requirement was included to address the potential need for a technical amendment to Dialog’s Articles of Association to accommodate the depositary arrangements for the American Depositary Shares that are proposed to be issued in the transaction. Once Dialog was able to confirm that the Articles would not need to be amended, the merger agreement was amended to eliminate references to a vote that would be unnecessary. The amendment was not implemented in response to any concerns about shareholder support.
The Dialog General Meeting will be held at 12.00 noon GMT (1.00 p.m. (CET)) on November 19, 2015 at the offices of Reynolds Porter Chamberlain LLP, Tower Bridge House, St Katharine’s Way, London E1W 1AA, United Kingdom. Dialog investors with questions about the transaction should contact Dialog or its proxy solicitors, Ipreo Limited (outside of the United States) and Innisfree (United States), using the contact information below.
(*) Illustrative cash flow presentation, link to Dialog website; http://www.dialog-semiconductor.com/sites/default/files/9_29_15_dialogatme_l_investor_presentation.pdf
