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Why MagnaChip Semiconductor Stock Just Popped 25%

By Rich Smith - Mar 31, 2020 at 12:14PM

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MagnaChip will sell businesses contributing 40% of its revenues -- for a price 85% of its market cap.

What happened

Stocks are treading water today, with the Nasdaq Composite notching a less-than-1% gain as of 12:25 p.m. EDT and the Dow a less-than-1% loss. One stock in particular, though, is "breaking the curve" -- and in a big way.

Semiconductor-maker MagnaChip (MX 2.83%) is off to the races in early afternoon trading today and up 24.7% in response to news that it's just made a deal to sell its "Foundry Services Group" and its factory in Cheongju, South Korea (Fab 4) to a South Korean special-purpose company established by Alchemist Capital Partners Korea Co., Ltd. (Alchemist) and Credian Partners, Inc. (Credian). Together, they're acting as the "AC Consortium" to make the purchase. 

Glowing semiconductor chip

Image source: Getty Images.

So what

Why is this a big deal?

Consider this: All of MagnaChip has a market capitalization of just over $400 million presently. But the deal with the AC Consortium values the assets up for sale at $435 million, of which $345 million will be paid to MagnaChip in cash. The balance of the $435 million will comprise SPC's assumption of what would ordinarily have been MagnaChip's statutory severance liabilities to pay its employees $90 million in total compensation upon their transfer to the new owner.

MagnaChip will only be grossing about $345 million from this deal. Still, that's about 85% of what the entire company is worth -- and to get it, all MagnaChip has to do is sell a business that accounts for less than 40% of its annual revenues (according to data from S&P Global Market Intelligence).

Now what

That sounds like a pretty sweet deal, and MagnaChip CEO YJ Kim agrees. He called the sale of the Foundry Services Group "an excellent outcome for all our stakeholders, including customers, employees and investors."

With the cash from this deal, even after deducting fees and taxes, MagnaChip should be able to pay off a substantial portion -- if not all -- of its $318 million in debt. The company can also focus more intently on its display solutions and power-solutions businesses, which combined make up about 60% of annual revenues currently -- and produce 64% of the company's profits.

As company Chairman Nader Tavakoli noted, going forward, MagnaChip will be a tech company "streamlined operationally, largely freed of interest expense and ... ideally positioned for continued future success."

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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