Applied Materials, Inc. (NASDAQ: AMAT – $45.43) announced a definitive agreement to acquire all outstanding shares of Kokusai Electric Corp. for $2.2 billion in cash from global investment firm KKR. Kokusai Electric is a leading company in providing high-productivity batch processing systems and services for memory, foundry and logic customers and complement Applied’s leadership portfolio in single-wafer processing systems. Following the close of the transaction, Kokusai will operate as a business unit of the Applied’s Semiconductor Products Group and continue to be based in Tokyo, with technology and manufacturing centers in Toyama, Japan and Cheonan, Korea. Subject to regulatory approvals and other customary closing conditions, the acquisition is expected to close in about twelve months and be immediately accretive to AMAT’s adjusted earnings per share. Applied expects to finance the transaction using a combination of cash and a term loan facility. Following the close of the transaction, the company will prioritize repayment of the term loan balance while maintaining its long-term commitment to return cash to shareholders through dividends and share repurchases.
Applied Materials is showing good earnings and cash flow quality along with a strong balance sheet. Earnings per share is on target to decline in fiscal 2019 ending in October to $2.97 from $4.45. However, next year should improve as a rebound in semiconductor systems revenue and the long-term growth for chips remain in place. Street consensus is at $3.64 per share, providing a reasonable forward valuation of 12 times estimated 2020 earnings. Along with share buybacks, positions currently yield a 1.9% dividend return and can be maintained in a well-diversified aggressive account.