Elpida Bondholders Oppose Micron’s $2.5 Billion Takeover – Businessweek

Elpida Memory Inc. bondholders urged
a Japanese court to reject Micron Technology Inc. (MU) (MU)’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 (MU), 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 (MU) 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. (5346)’s 24
percent stake in Rexchip Electronics Corp. (4932) 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. (000660), 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).

To contact the reporter on this story:
Joe Schneider in Sydney at
jschneider5@bloomberg.net

To contact the editor responsible for this story:
Anand Krishnamoorthy at
anandk@bloomberg.net