This post began its life as a comment, morphed into email, and has now settled down into this rambling rumination. Along the way Tower reported Q2, so I’m including SanDisk related highlights as well.
After “SanDisk and Tower Semiconductor,” thought I should include a follow-up comment on the Israel Corporation (IC). It quickly become clear that much more was going on than met the eye, at least as far as share count went.
It’s clear enough that Tower has about 122M ordinary shares, but there are a whole lot more lurking as outstanding/ convertible/ exercisable shares. How many?
I decided simply to ask Tower’s USA Investor Relations. One email later, received a prompt reply, with no numbers, pointing me to SEC documents.
Tower of Shares
As I dug through documents, more and more potential shares kept appearing. These occur in several big chunks that don’t show up in shares outstanding.
118M additional potential shares are related to equipment needed in 2006 for the last ramp up to 24,000 wafers/month. Israel Corp was willing to step in with $100M but required that Tower refinance its $527 million long term debt with Bank Leumi and Bank Hapoalim.
This was done and a portion of the long term debt was reduced with a debt for equity swap. $160M of bank debt was swapped for $80M of equity, a 2 for 1 conversion ratio. The banks received 52M Tower shares.
Separately the Israel Corp put up $100M for fab equipment, paying the equipment suppliers directly. Israel Corp received 66M Tower shares.
In addition, another 129M potential shares are lurking in convertible bonds, warrants and employee and director options.
Believe the total potential Tower share count including ordinary shares plus potential outstanding/convertible/exercisable shares is on the order of 369M shares = 122M ordinary + 52M banks + 66M Israel Corp (tools) + 129M misc.
So I emailed this conclusion to Tower’s USA IR, for confirmation. No reply– which the cynic in me interprets as confirmation of a sort. If anyone at Tower, or SanDisk for that matter, is reading this and I’ve got it wrong, feel free to leave a comment. Will be happy to correct the count.
All these shares are a reflection of Tower’s problems raising capital. Tower’s ongoing problems could be a big drag on SanDisk, which is probably why Eli is keeping a close eye on Tower operations. As bad as it was, things are looking up.
Out of Critical Care, and a Good Thing Too
Tower’s darkest days were in 2005. For a sense of how bad it was, here are two good articles:
Tower of jelly
Guy Rolnik 07.3.2005
“What Idan Ofer did was despicable and stupid.”
Carmel Vernia is boiling mad and he wants revenge. Two weeks ago the retiring Tower Semiconductor’s CEO and chairman received an unusual review from the chairman of the The Israel Corporation. In a truly rare move, Ofer pointed the finger of blame at Vernia: “There was a management problem at Tower,” he accused, adding that the company had failed to fulfill its business plans…
“Amateurish and negligent,” Vernia describes the management of Fab 2 from day one. He describes problems in financing (not settled in advance), and in operations (orders were not secured in advance). Also, the business model of bringing in strategic partners who would also be major clients backfired, because when the market tumbled, only one of the partners – Sandisk continued to place orders.
Tower of red ink
Shirley Yom Tov
It is hard to overcome the automatic association of Israeli chip maker Tower Semiconductors (Nasdaq:TSEM) to giant losses and sweeping layoffs.
There are grave doubts as to whether the company will ever return the multi-billion shekel investments made in it over the years.
Three months ago, Tower gained a new chief executive: Russell C. Ellwanger, 50, replaced Carmel Vernia. Ellwanger has his work cut out for him: he has to restore client faith in the company, and at home, the situation isn’t pleasant. The 1,300 workers still remaining want to know how he can save their skins, and then there’s that half-billion debt to Bank Leumi and Bank Hapoalim. Tower owes another $25 million to bondholders, and meanwhile its paper has achieved the dubious honor of junk status, with yields of 30%. Nor is the company’s profit and loss statement a thing of joy, considering the company’s $47 million loss for the second quarter of 2005.
To Tower’s credit it has come a long way since 2005. Today, things are looking up.
And a good thing too as Tower supplies a significant portion of SanDisk’s controller wafers and is currently a sole source of supply for certain controllers. If SanDisk were to have to find another source for these controllers it could take three or more quarters. This would be a big problem. Fortunately Tower seems to be getting its act together.
And which controller wafers might Tower be manufacturing?
SanDisk began purchasing controller wafers from Tower in the third quarter of 2003. In 2002 and early 2003 United Microelectronics Corporation (UMC) manufactured all of SanDisk’s controller wafers. Through 2006 UMC and Tower shared controller supply for SanDisk.
In 2007, Taiwan Semiconductor Manufacturing Company (TSMC), and Semiconductor Manufacturing International Corporation (SMIC) were added to the list.
To my knowledge neither SanDisk or Tower has ever released a comprehensive list of which controllers Tower manufactures for SanDisk.
In July at the C.E. Unterberg, Towbin Emerging Growth Conference, Tower CEO Russell Elwanger noted that “We are the sole suppliers to SanDisk for all the secure storage controllers.” Working back through press releases, “secure storage controllers” seems to be the common thread for the most important controllers that Tower produces for SanDisk. Secure controllers seems to mean TrustedFlash.
In 2005 SanDisk announced new TrustedFlash third generation memory cards with a 32-bit controller architecture and a cryptographic engine as part of the controller. This combination enables high performance encryption of downloaded content purportedly without compromising either security or performance.
SanDisk teamed up with Discretix technologies, an Israeli start-up, for the cryptographic expertise.
These microSD Memory Cards with TrustedFlash target mobile devices and provide on-card digital rights management. TrustedFlash is important for SanDisk strategically and deserves its own dedicated post. Will try to get to it in the next several weeks.
Other controllers produced by Tower include those for Memory Stick PRO Gaming Cards, and U3-enabled USB flash drives.
Tower Q2 Conference Call
Still find it remarkable how little Tower has to say about SanDisk, its largest customer, on quarterly conference calls. Don’t think this is by chance. Am not sure why Tower never elaborates, but find it curious.
That said, the positive wafer-ramp story for Fab 2 remains intact. Tower had plans to ramp to 24,000 wafers thanks to a $9.8 million loan from SanDisk for equipment for 0.13 micron logic wafer capacity. Tower hit this target in August.
Tower is actively pursuing the acquisition of second hand tools for 130 nm and 90 nm aiming at a capacity of above 30,000 wafer starts per month by mid 2008. Tower noted that the second hand equipment is priced at about 1/3 the price of new tools.
Mid-August, the Tower VP responsible for tool procurement, was in the US finalizing negotiations with the used tool suppliers.
To fund the tool procurement and associated costs, Tower has signed letters of intent with lender banks and the Israel Corporation to provide credit lines up to $60M to secure the funding for the purchase. The financing approach was made with the target of not further diluting current shareholder equity. Not surprisingly this is a current Ellwanger favorite refrain.
Tower confirmed that it only makes controllers (.18 and .13 micron) for SanDisk.
When asked about reports of further SanDisk investment in Tower, Ellwanger played it cute:
There were rumors that SanDisk was going to be investing. There still are rumors that SanDisk would be investing in Tower. I don’t think that there was ever any report that they actually did invest, because that is very easy to track. But as we have stated previously and I’ll state the same now. SanDisk is a very good customer for Tower. We have very strong relationships with them. We value them as a customer. If and when it becomes public, everyone will be the first to know. Until then I really don’t have any comments.
Note that Ellwanger didn’t say, “If SanDisk invests”, instead he said, “If and when it becomes public.” Big difference. Maybe a slip, maybe just a mistake. Time will tell.
In any case it feels like SanDisk is scheming on Tower . If SanDisk invests further, it will be interesting to see how SanDisk’s plan deals with that Tower of looming potential shares.
To accompany this post, am posting a transcript of Tower’s 08.15.2007 Q2 conference call.