Aixtron’s Beauty Parade

German technology company Aixtron today received a cash bid at €6 per share from Chinese private equity company Fujian Grand Chip¹. This transaction value of €670m represents a 50% premium to the average price over the last 3 months of €3.97 and a 20% premium to the average price over the last 12 months of €5.04¹. Argonaut funds and mandates currently own 9.7m shares (8.6% of the company) which to our knowledge makes us today the company’s largest shareholder. We believe it is in our unit-holders best interests to communicate our view: we think that a deal for the company is probable but we are not yet convinced it will be the offer currently on the table.

Aixtron has suffered in recent years from a cyclical downturn in the global LED market which has seen its revenues plummet from €784m in 2010 to just €198m last year¹. Nevertheless the company has currently no debt and £182m of cash on its balance sheet¹. Moreover, Aixtron has invested a whopping €303m in R&D over the last five years (2011-2015) much of it in new technologies (such as TFOS and OLED Deposition systems) which are yet to be fully commercialised¹. The lack of visibility on the potential of the new technologies and timing of the cyclical upswing is to a certain extent mitigated by the balance sheet providing a margin of safety.

We began buying Aixtron shares in Q4 2015 and accelerated our purchases in Q1 2016 following a significant profit warning. Our investment rationale was that the market value of the company didn’t reflect either the possibility of a cyclical recovery in LED, the monetisation of its new technologies or the optionality of a possible bid from another industry player, particularly when the huge cash pile was taken into account. We note for example that the Fujian Grand Chip bid is being financed with just €231m of equity, which after deducting Aixtron’s £182m of cash - which could be paid out as an extraordinary dividend - is a net equity investment of just €49m (7.3% of the transaction value)¹. This demonstrates how Aixtron’s lazy balance sheet could be put to work by a more aggressive or better financed owner.

We are as yet unconvinced that Fujian Grand Chip is the best owner of Aixtron. It is not clear how Chinese private equity being the owner of the business would result in any tangible increase in Aixtron’s revenues or profits even in China. By contrast industry players could extract more synergies either through accelerating the commercialisation of Aixtron’s technology pipeline or by extracting synergies through cost rationalisation. As such it is logical to believe that an industry player could put a higher bid than Fujian Grand Chip on the table. Aixtron is rumoured to have been in talks with other industry players such as Veeco and Applied Materials, but we understand that interest was focused on specific parts of the business.

The bid has been recommended by Aixtron’s Supervisory Board with the current management team remaining in place. We understand that Grand Chip has also given assurances that there will be no redundancies or reductions in research and development expenditure and that the company will remain independent, headquartered in Germany. However there would not appear to be anything preventing Fujian Grand Chip from breaking up the business and selling off Aixtron’s assets to the highest bidder in an asset flip.

The offer is expected to commence in July 2016, subject to the necessary regulatory approvals with an acceptance period of 10 weeks. Although we understand that under German law Aixtron’s Supervisory Board are under no obligation to disclose competing bids, other suitors may well emerge over the coming weeks.

Barry Norris
Argonaut Capital
May 2016