Intel to Buy Tower Semiconductor for $5.4 Billion

On Feb. 15, Intel (INTC) announced it will acquire Tower Semiconductor (TSEM) for $5.4 billion or $53 per share in cash, which represents a 61% premium to Tower's closing price on Feb. 14. This is a fairly hefty premium relative to other chip deals (with premiums closer to 40%-50%). We are maintaining our $65 fair value estimate, as we think the premium paid would be offset by potential revenue and cost synergies. We think long-term investors should find shares of wide-moat Intel attractive.

Tower focuses on analog and specialty technologies made on mature process nodes, such as radio frequency, power, silicon-germanium (SiGe), and industrial sensors with a focus on end markets including mobile, automotive, and industrial. As part of Intel’s IDM 2.0 strategy announced last March, the chipmaker intends to more meaningfully offer foundry services to fabless chip designers to take advantage of burgeoning demand in AI, automotive, 5G, and other promising end markets. We think acquiring Tower would kickstart Intel Foundry Services, or IFS, as Intel would gain a fabless customer base, additional global fab capacity, and IP libraries and customer support capabilities. Tower's mature/specialty capacity also complements Intel's leading-edge logic offerings, while Intel would offer Tower the scale to better compete with larger foundry peers.

The transaction is expected to close in about 12 months, and we do not anticipate any major regulatory hurdles given the complementary nature of the deal. Despite the strategic fit, Tower's gross margins (22% in its most recent quarter) would be significantly dilutive to Intel's margins. Intel CEO Pat Gelsinger aims to drive IFS gross margins toward those of industry-leader TSMC (50% gross margins). We think this is quite an ambitious target that would take years to reach and requires consistent execution and significantly greater scale. Intel will host its investor meeting on Feb. 17, at which we expect to hear more about Gelsinger's vision for IFS.