Elpida Bondholders Oppose Micron’s $2.5 Billion Takeover

Elpida Memory Inc. bondholders urged a Japanese court to reject Micron Technology Inc.’s planned 200 billion yen ($2.5 billion) takeover of the bankrupt memory-chip maker, saying the deal is “severely detrimental.”

The bondholders, claiming to represent Japanese and international pension funds, plan to propose an alternative to Micron’s deal, according to a copy of a filing in Tokyo District Court, a translation of which was submitted July 9 in U.S. Bankruptcy Court in Wilmington, Delaware. Elpida filed for bankruptcy protection in February.

Micron agreed to buy Elpida on July 2 in a deal that would double the U.S. company’s share of the global market for dynamic random access memory, the most widely used memory chips in personal computers, to about 24 percent. The deal would help Micron vie with industry leader Samsung Electronics Co. while giving it greater control over supply gluts that have caused it to report losses amid falling prices.

“The creditors cannot be compelled to accept a Micron transaction that produces a recovery below that which would result from a liquidation of the estate,” the bondholders said.

An Elpida spokesman declined to comment and asked not to be named, citing company policy. Dan Francisco, a spokesman for Boise, Idaho-based Micron, didn’t immediately respond to a phone message and e-mail outside office hours.

Scuttling the Deal

“It would be difficult for bondholders to scuttle the deal,” said Koji Ishikawa, a lawyer at DLA Piper in Tokyo, who isn’t involved in the case. Still, “there may be room for negotiation if bonds are privately placed and have veto provisions,” he said.

Micron agreed to pay 60 billion yen in cash at the closing of the deal, while the remaining 140 billion yen in future annual installments through 2019 will come from cash flow generated by Micron’s payments for chips made by Elpida, according to the July 2 statement.

The proposal has so many conditions it’s essentially worthless, the bondholders said.

Micron has said the installment payments will be interest-free, with no financial covenants and the promise doesn’t seem legally binding, according to the bondholders.

“Creditors cannot be confident that they will ever be made,” the bondholders said, referring to the installments.

Micron will be able to burden Elpida with debt, jeopardizing future payments, according to the filing.

Paying for Acquisition

Micron also gets all of Elpida’s cash and working capital under the proposal, amounting to about 111 billion yen for its 60 billion yen upfront payment, the bondholders said.

“Elpida may be paying Micron for Micron’s equity investment,” the bondholders said.

Despite the objections, the bondholders aren’t likely to block the sale, Katsuhide Takahashi, a credit analyst at Citigroup Inc. in Tokyo, said today.

“There may be a possibility for Micron to make some kind of consideration to bondholders,” Takahashi said.

Micron, the largest U.S. maker of computer memory, won approval from the Tokyo District Court in May to negotiate to buy Elpida’s entire business after the Japanese company held two rounds of bidding. The July 2 agreement is subject to approval by the Tokyo court, which Elpida said it will seek in August. Creditors must also approve the agreement. The companies plan to complete the sale in the first half of 2013.

‘Upside’ Potential

In a related transaction, Micron also agreed earlier this month to buy Taiwan-based Powerchip Technology Corp.’s 24 percent stake in Rexchip Electronics Corp. for about NT$10 billion ($334 million). The deal will give Micron control of manufacturing facilities that will boost its output by about 200,000 silicon wafers per month, or 50 percent.

“Micron will obtain, for no cost, all of the ‘upside’ potential of Elpida’s business,” the bondholders said in the court filing, referring to Elpida’s 65 percent stake in the Taiwanese DRAM producer Rexchip.

The bondholders valued the Rexchip stake at 72.3 billion yen, more than the cash price Micron is proposing to pay for all of Elpida, according to the filing.

Elpida sought protection from creditors in February after prices of DRAM chips plummeted. The lower prices and a stronger yen, which erodes the value of repatriated earnings from overseas, led the company to report a fifth straight quarter of losses. SK Hynix Inc., the only company that had publicly expressed interest in buying Elpida at the time, decided not to participate in the second round, the Icheon, South Korea-based manufacturer said May 4.

DRAM prices are set to rise over the next two years, with supply growth below 40 percent, the bondholders said, citing a Deutsche Bank AG analysis of the market.

“How can one avoid the conclusion that the Micron deal is grossly unfair to the estate,” the bondholders said.

The case is In re: Elpida Memory Inc., 12-10947. U.S. Bankruptcy Court District of Delaware (Wilmington).

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