(Repeats ahead of U.S. market open, adds source comment in eighth graf, SanDisk’s closing price on Friday) (For more Reuters columns on deals, double click on [DEALTALK/])
By Anupreeta Das
SAN FRANCISCO, Oct 6 (Reuters) - SanDisk Corp SNDK.O could be worth $34 to $36 a share if Samsung Electronics Co Ltd (005930.KS) were to sweeten its offer to reflect the value of royalties it pays to the U.S. flash memory maker, according to people familiar with the matter.
South Korea-based Samsung, the world’s top memory chip maker, made public an offer to buy SanDisk for $5.85 billion, or $26 a share, on Sept 16, after SanDisk rebuffed the offer in private.
Samsung makes memory chips based on NAND flash technology, while SanDisk is best known for its flash memory cards that use such chips. Flash is a type of compact data storage used in consumer gadgets such as digital cameras and MP3 players.
SanDisk said Samsung’s offer undervalued the company, but the board made clear in a letter to Samsung Chief Executive Yoon-Woo Lee that it was open to talks at a higher offer that reflected the “intrinsic value” of the company.
SanDisk has not yet said what such an offer might be, but the two sources said a per-share offer in the mid-$30s is likely to be a more agreeable price to get the ball rolling on negotiations and eventually toward a deal.
The sources declined to say whether executives and advisers from both sides have met since the offer was made public.
Samsung said its offer, which represented an 80 percent premium to SanDisk’s closing price on Sept 15, is “full and fair.”
A source close to Samsung questioned whether SanDisk would be able to pull up its stock price and generate shareholder value as a standalone company, given the wider volatile market conditions. SanDisk shares closed Friday’s session down 11 percent at $18.38.
Analysts have speculated that SanDisk may be seeking a much higher price than Samsung’s offer because it holds several key flash patents, but that the Korean company might not be willing to offer too much more given SanDisk’s depressed stock price.
Flagging consumer demand for these products amid the economic downturn, coupled with an industrywide oversupply of flash memory chips, have hit SanDisk’s revenue and pummeled its shares, which have fallen more than 60 percent since last October.
Lazard Capital Markets analyst Daniel Amir wrote in a Sept. 17 research note that SanDisk might be seeking as much as $64 per share from Samsung. But he added it was “highly unlikely” Samsung would raise its offer that much, and “mid-$30s would probably be the limit.”
Citigroup analyst Craig Ellis said Samsung may sweeten its offer to $28-$30 a share, but SanDisk would probably not accept it unless uncertainties around royalty payments, synergies and regulatory risks are addressed.
SanDisk founder and Chief Executive Eli Harari has accused Samsung of trying to snap his company up on the cheap while the two are in the midst of renegotiating an intellectual property licensing agreement.
Under the agreement, which comes up for renewal in 2009, Samsung pays SanDisk about $350 million a year in royalties to use its patented flash memory technology. Buying SanDisk would give Samsung access to these patents and save it hundreds of millions of dollars in annual payments.
SanDisk’s rich portfolio of patents includes its lucrative “x4” multilevel cell know-how, but the total value is not publicly known.
“SanDisk’s shareholders deserve to be fairly compensated for the value SanDisk offers Samsung, and your current offer fails to recognize and monetize this value,” Harari wrote in the letter rejecting Samsung’s proposal.
SanDisk also insisted that the two companies negotiate a replacement licensing agreement that would kick into effect next August if a deal doesn’t happen by then.
Licensing and royalty payments brought SanDisk $450 million in revenue last year, or 12 percent of its total revenue of $4 billion — a stream that SanDisk wants to protect if a deal doesn’t go through, or be adequately compensated for in the event of a merger with Samsung.
The Milpitas, California-based company makes the rest of its money by selling flash memory cards and related products to retailers and makers of consumer gadgets. (Editing by Kenneth Barry & Kim Coghill)