Analysts: Spin-off puts AMD back in the fight with Intel

Wall Street welcomes news that a Middle East firm is taking a load of debt off AMD's back

By splitting off its manufacturing operations into a separate company, Advanced Micro Devices Inc. could be on track to become the nimble, innovative company that once had Intel Corp. on the run.

AMD this morning announced plans to spin off its manufacturing operations into a separate company. With this dramatic turn, struggling AMD not only rids itself of the financial burden of running fabrication plants, it gains a hefty influx of cash from its partner in the deal, Advanced Technology Investment Co. (ATIC).

"I don't think this will give us a whole new AMD, but the industry will be dealing with an AMD that's a good deal more nimble because they won't be dealing with the same financial burdens or dealing with the fab plants," said Dean McCarron, president of Mercury Research in Cave Creek, Ariz. "Because this lowers the break-even point for AMD, it gives them staying power in the market and will help them focus on design and sales again."

Early in the decade, AMD had grabbed a solid footing in the semiconductor market. Its success was a key reason for Intel's stumbles between 2003 and 2005. But come 2006, Intel responded with a reorganization that curbed AMD's momentum. After that, AMD stumbled under the financial burden of acquiring ATI Technologies Inc. and the delay of its Barcelona chip.

Both McCarron and Dan Olds, principal analyst at the Gabriel Consulting Group, said simply getting a big chunk of debt off its back could help the chip maker regain some of the fire that once had it nipping at rival Intel's heels.

"It's like the old AMD after a spa and rehab vacation," said Olds. "They've come back stronger financially and in better shape overall. They're still the same company and they still [partially] own their fab operations. It's like they got a rich uncle to help them out."

Word of the spin-off was welcome news to Wall Street, which responded by lifting AMD's stock by 18% this morning -- at the same time that the Dow had dropped by 200 points, noted John Lau, a senior semiconductor analyst and managing director at Jefferies & Co., who predicted the spin-off early last month.

Lau said the spin-off of the fab operation is a necessary move for AMD. "This fab spin-out changes the equation on how to remain competitive," he said. "Now it's a design race."

The new offshoot business, which is being temporarily called The Foundry Co., will be co-owned by AMD and ATIC, which is owned by the government of Abu Dhabi in the United Arab Emirates. ATIC will shell out $2.1 billion -- $1.4 billion going to the new company and the rest going straight to AMD, according to AMD.

The Foundry will assume about $1.2 billion of AMD's debt.

ATIC will own 55.6% of The Foundry, and AMD will own 44.4%. Its board of directors will be equally divided between representatives from AMD and ATIC.

As part of the deal, Mubadala Development Co., also based in Abu Dhabi, will pay $314 million to increase its stake in AMD from 8.1% to 19.3%.

"We are joining with the Advanced Technology Investment Co. to create a brand new company -- one that epitomizes a new global enterprise with talent and resources from around the world," said Dirk Meyer, AMD's president and CEO, in a conference call this morning. "This will result in a financially stronger and more focused AMD."

Although AMD will be The Foundry's first customer, it will build chips for other companies as well.

Doug Grose, senior vice president at AMD and the incoming CEO of The Foundry, said in a conference call today that ATIC has promised to invest between $3.6 billion and $6 billion over the next five years to fund an expansion of The Foundry's chip-making capacity. The plan includes going forward with a planned capacity expansion at a fab facility in Dresden, Germany, next year.

Lau, however, noted that all the influx of cash does not erase all of AMD's debt. The company has been carrying about $5.4 billion in debt, so the deal will leave it with $3.3 billion in debt. "There is still a lot of debt, but the cash burn to maintain the fabs is no longer there," he added. "We believe this is well received as a positive for the company going forward."

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