Intel (INTC 0.61%) is enduring a painful year. Because of worsening economic conditions, the semiconductor manufacturer's revenue tumbled 20% in the third quarter, while its earnings plummeted even further. That's putting pressure on its financial profile as the company strives to fund its ambitious expansion program while maintaining its high-yielding dividend.
This painful situation led Intel to seek outside-the-box ways to finance its growth to maintain its balance sheet strength and investor payout. It did that by unveiling a first-of-its-kind semiconductor co-investment program, with Brookfield Infrastructure (BIPC 1.39%) (BIP 2.21%) signing on as the first participant. Intel's pain looks to be Brookfield's gain.
Getting creative to ease its financial pain
Intel has an ambitious expansion plan to grow its chip-making capacity in the U.S. It's investing upwards of $30 billion to build two leading-edge chip factories in Arizona. It also plans to spend more than $20 billion to build two more factories in Ohio. On top of that, Intel is investing heavily in several other capital projects worldwide.
While the company generates lots of cash and has a cash-rich balance sheet, deteriorating market conditions are making it harder for the company to fund its expansion and dividend while maintaining a strong financial profile. The company sees its full-year net capital spending coming in at $21 billion on a non-GAAP basis and projects that its adjusted free cash flow will be negative-$2 billion to $4 billion. That's causing the company to burn through cash as it also funds its dividend, which has totaled nearly $4.5 billion over the first nine months of the year. As a result, its cash, equivalents, and short-term investments have fallen from $29.3 billion toward the end of last year to $22.6 billion in early October. Meanwhile, debt has risen from $33.5 billion to $37.2 billion.
This situation led Intel to strike a funding partnership with Brookfield for its two plants in Arizona. They will jointly invest up to $30 billion, with Intel funding 51% and Brookfield financing 49% of the cost. That arrangement will enable Intel to protect its cash and debt capacity for other investments while allowing the company to continue growing its dividend.
A perfect fit for Brookfield
Intel's need for a funding partner came at the perfect time for Brookfield Infrastructure. The company has nearly completed its current backlog of capital projects, which includes the Heartland Petrochemical Complex in Canada and the second phase of its electricity transmission line build-out in Brazil. It was able to replenish its capital project backlog with this deal. The company's total equity commitment will only be about $500 million, with the rest sourced from its institutional partners and non-resource debt that the company has already secured. Brookfield can finance the equity portion with retained cash flows and the proceeds from its capital recycling program. It will fund most of that equity closer to the project's commissioning in 2024.
The investment also aligns with Brookfield's thematic approach to capitalize on the digitalization and deglobalization megatrends. The funding partnership will help Intel onshore some of its manufacturing capacity. It will also support increased digitalization by supplying the country with more semiconductors.
Finally, the investment should produce attractive returns for Brookfield. It's partnering with a highly creditworthy counterparty in Intel, and it isn't assuming any technological risk. It will receive 49% of the revenue generated from these facilities, which should be relatively stable because of growing semiconductor demand. According to an estimate by IDC, global chip revenues should reach $1 trillion by 2030, up from its projection of $638 billion for this year. That aligns with its strategy of investing in assets that produce predictable cash flow.
This investment puts Brookfield in an even stronger position to deliver organic growth at or above its 6% to 9% target range over the next few years. The company should have no problem delivering on its objective of expanding its 4.4%-yielding dividend at a 5% to 9% annual rate.
An ideal investment for Brookfield
Intel's financial troubles couldn't have come at a better time for Brookfield Infrastructure. It was able to capitalize on Intel's need for a funding partner to replenish its capital project backlog. The investment aligns with the company's thematic approach while positioning it to earn attractive returns. That further bolsters the company's growth profile, which should enable it to continue increasing its attractive dividend.
