'We'll pay nothing': TowerJazz seeks growth with minimal investment

DB HiTek

04/10/2017 12:09

* CEO made deals with Panasonic, Maxim with little cash down 
    * Has transformed TowerJazz into profitable, debt-free firm 
    * But strategy could limit growth, risk competitiveness 
    * TowerJazz needs to secure more capacity by end of 2018 
 
    By Tova Cohen and Steven Scheer 
    MIGDAL HA'EMEK, Israel, Oct 4 (Reuters) - Executives at 
Panasonic were surprised when Russell Ellwanger, CEO of Israeli 
chipmaker TowerJazz  TSEM.TA , asked to partner in three of 
their factories without putting any cash on the table. 
   "They had said that to do the deal it would be between a $300 
million and $400 million cost for us," he told Reuters in an 
interview. "I said, 'No, we want to do this deal ... but we will 
pay nothing'." 
   Instead Ellwanger sealed the joint venture with what he 
characterised as a win-win deal: his company filled the unused 
capacity at the Japanese plants and struck a five-year deal to 
supply chips to Panasonic  6752.T  from the joint venture. It 
also agreed to hand over $7.5 million in TowerJazz stock, plus 
about half of what it earned from selling chips made at the 
factories to other customers.  
    The latter presents Panasonic with $100 million a year. 
    Ellwanger has managed to strike agreements - like the 2014 
Panasonic one - to expand the company's manufacturing operations 
with minimal investment. He is counting on this strategy to 
drive further growth - but it has its limits and risks.  
    Rather than building or buying a factory at huge cost, 
TowerJazz looks for plants owned by bigger fish with idle 
capacity that is hitting their profitability. It takes up that 
capacity while striking supply deals and offering other 
incentives such as a cut of profits and technical know-how. 
    Ellwanger used similar tactics to acquire a factory in Texas 
from Maxim Integrated Products  MXIM.O  that wasn't producing at 
full capacity and thus costly to run. Rather than paying in 
cash, it struck a 15-year supply deal with the U.S. 
multinational and handed over $40 million in stock.  
    In the latest deal, TowerJazz said in August it was linking 
up with Tacoma Semiconductor Technology to establish a plant in 
China. It will not invest any money but will provide 
technological and operational expertise in exchange for half the 
annual capacity of 240,000 chips.  urn:newsml:reuters.com:*:nL8N1L73LL  
    The ability to identify such opportunities has 
been Ellwanger's signature since 2005, when he left California 
to take on the task of running TowerJazz, which had $100 million 
in annual revenue and was saddled with $530 million of net debt. 
    The company, which specialises in the kind of analog chips 
used in cars, medical sensors and power management, is now 
debt-free, profitable and with annual revenue approaching $1.5 
billion. Its shares are up 64 percent in 2017 versus a roughly 
30 percent gain in the Philadelphia chip companies index  .SOX , 
and have doubled over the past 12 months.  
     
    LIMITS TO GROWTH 
    The strategy of filling the unused capacity of the likes of 
Panasonic and Maxim is partly born of necessity. Building or 
buying a factory can costs hundreds of millions of dollars, a 
big undertaking for a company with net cash of $143 million at 
the end of June. 
    However such opportunities do not come around very often, 
limiting the company's growth. And with chipmaking heavily 
dependent on volume, TowerJazz faces a challenge in increasing 
production capacity fast enough to remain competitive in the 
market for specialty analog chips.  
    At present the company only has enough capacity to increase 
annual revenue to $1.62 billion by the end of 2019, according to 
Credit Suisse semiconductor sector analyst Quang Tung Le, who 
last month started coverage of Tower.  urn:newsml:reuters.com:*:nL4N1M73QJ 
    Craig-Hallum analyst Richard Shannon said the company would 
hit the limits of their capacity by the end of 2018, precluding 
further growth. "The timeframe to get capacity online (in China) 
will not be early enough," he added. 
    The analog chips produced by TowerJazz regulate functions 
such as temperature, speed, sound and electrical current as 
opposed to digital chips that process binary information. 
Manufacturers of analog, and mixed-signal, devices tend to have 
more varied markets than digital.  
    In the analog/mixed-signal foundry sector TowerJazz has a 30 
percent market share followed by Vanguard  5347.TWO , Hua Hong 
Semiconductor  1347.HK , Dongbu Hi Tek  000990.KS  and X-FAB 
 XFAB.PA .  
    "Since Russell took over he has performed a heroic 
turnaround of a company that was on its deathbed," said Robert 
Katz, managing director of New York-based Senvest Management, 
TowerJazz's second-largest investor with a 5.2 percent stake.  
    Ellwanger says TowerJazz had enough capacity without China 
to get through 2018, but he's actively pursuing more deals like 
the one with Panasonic to fill the impending gap. 
    "There are technologies we are looking at buying," the CEO 
said in the interview at his offices in the northern city of 
Migdal Ha'emek, near TowerJazz's two Israeli plants, built 
before he joined the company.  
    He added that TowerJazz wanted to "get strongly into 
sensors". 
    Drexel Hamilton analyst Cody Acree said South Korea's Dongbu 
could be a target as it would be immediately accretive to 
TowerJazz's earnings. German-based X-FAB and Taiwan's Vanguard 
also make sense as targets, he said, but trade at higher 
valuations. 
    Ellwanger declined to comment on such speculation, though he 
said: "I would have nothing against having a facility in Korea." 
   
 
 
 (Editing by Pravin Char) 
 ((tova.cohen@thomsonreuters.com; +972-9-899-0222; Reuters 
Messaging: tova.cohen.thomsonreuters.com@reuters.net)) 
 
Keywords: TOWERJAZZ CEO/