Broadcom Gives Notice, and Street Debates Potential Intel Take-Out

Shares of Broadcom (AVGO) are up $8.08, or 3%, at $261.86, after that report from The Wall Street Journal late Friday that Intel (INTC) is closely watching its hostile bid for Qualcomm (QCOM), and hoping Broadcom fails, so Intel can buy Broadloom.

Intel is down 32 cents, or 0.6%, at $51.87, while Qualcomm is down 45 cents, or 0.7%, at $63.48.

The rumor was followed by an update this morning by Broadcom, which announced it expects to complete its planned shift of domicile to the U.S. by April 3rd. This follows a report yesterday by Greg Roumeliotis of Reuters stating that the CFIUS panel investigating the Qualcomm bid ordered Broadcom to give it five business days' notice "before taking any action toward redomiciling to the U.S.," citing a regulatory filing.

CFIUS "is aware that its jurisdiction could be contested if Broadcom redomiciles to the United States."

In its announcement this morning, Broadcom took the opportunity to pitch for its bid for Qualcomm again, noting that its bid was never "conditioned on CFIUS clearance," and that "U.S. national security concerns are not a risk to closing, as Broadcom never plans to acquire Qualcomm before it completes redomiciliation."

Among Street observers looking at all this, this morning, is Stacy Rasgon of Bernstein. His note, "It's a mad, mad, mad, mad world…" offers that an Intel purchase of Broadcom would be a huge amount of leverage:

To pull something like this off, INTC will need to pay up; a 25% premium to the recent $280+ high -water mark would be $350+, making this a hypothetical $170B+ EV deal. 2) While technically feasible, leverage would be very high, with ~$100-$160B in net debt at 3-4x EBITDA, and 5-7x debt to FCF given INTC's significantly higher capital intensity.

Moreover, he sees questionable earnings accretion and questionable "cost synergies" in a deal.

Rasgon admits he would ordinarily have "simply laughed this off," though he "adds "we suppose we could develop some sort of strategic rationale."

He concludes, "this seems like an awfully big risk to take for benefits that appear incremental at best, and (unlike AVGO), Intel's track record with acquisitions is (to put it charitably) spotty."

Someone who's more upbeat is RBC Capital's Amit Daryanani, who's got a Sector Perform rating on Intel, likes the notion of a deal:

We think AVGO (assuming a reasonable valuation is paid) would be an attractive acquisition for INTC. Our analysis shows the deal would be 85c-90c/20%+ accretive and would provide multiple positives for INTC: 1) A leading position in filtering and connectivity, given AVGO's best-in-class FBAR and wifi/bluetooth combo assets, 2) Ability to build an ecosystem around cloud and enterprise, given AVGO's assets in switching, routing (Tomahawk, Jericho, Trident) and storage, 3) Bigger AI opportunities, as we note AVGO is doing ASICs for machine learning workload, and 4) Material accretion potential over the coming years. In our analysis, we assume INTC funds the deal with debt and equity; this would potentially increase leverage to a manageable ~4x Net-Debt/EBITDA.

Craig Ellis of B. Riley, reflecting on the deal, thinks that "data center "share of rack" strategic logic is interesting" for a Broadcom bid. "But deal size ($244B market cap INTC and $104B market cap AVGO) along with regulatory and integration risks leave us cautious for now on prospects."

He suggests plenty of other options for Intel to buy, including Cypress Semiconductor (CY), IDT (IDTI), and Mellanox Technologies (MLNX).

KeyBanc's John Vinh reiterates an Overweight rating on Broadcom, writing that the stock's telling you the deal probably won't happen, which could ultimately lift share price:

With the stock trading at 12x forward P/E, close to trough valuation of 11x and below its 3-year median multiple of 13x, we view downside risk as limited. At current levels, we believe the likelihood of the QCOM deal falling through has already been priced in. If this were to happen, we believe this could serve as a near-term catalyst with the overhang removed. Moreover, we would anticipate AVGO to remain acquisitive in lieu of QCOM, which should continue to drive outsized earnings growth and ultimately stock outperformance.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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