Applied Materials to Buy Japan's Kokusai to Bolster Memory Chip Business

US chip gear maker Applied Materials on Monday agreed to buy Japanese peer Kokusai Electric for $2.2 billion from KKR & Co, as it bets on rising demand for memory chips used in data centres, 5G phones and AI-powered devices.

The acquisition comes against the backdrop of a glut in the memory chip market due to a decline in demand from smartphone makers that has squeezed prices and weighed on sales of chipmaking equipment.

Applied Materials said the Kokusai deal does not require the approval of US Justice Department, which had forced the company to scrap its $10 billion takeover of Japan's Tokyo Electron in 2015.

However, the Kokusai acquisition could still be scrutinized by Chinese authorities given the ongoing trade tensions between the United States and China, which last year derailed Qualcomm's $44 billion acquisition of NXP Semiconductors.

As Kokusai is a small acquisition, the road to approval should be easy, but China's willingness from a political standpoint is always a risk, Evercore analysts said.

While the last major round of talks between the world's two largest economies collapsed in May, they agreed on Saturday to restart their trade negotiations.

Apart from China, the acquisition will need approvals from Israel, Ireland, Japan, Korea and Taiwan, Applied Materials Chief Financial Officer Dan Durn said on a call with analysts.

Memory Boost
The deal comes less than two years after KKR took control of Hitachi Kokusai in a $2.2 billion deal. The Financial Times had reported in February that the private equity firm was in talks with two Chinese buyers for the "full or partial" sale of the company.

Although Kokusai's batch wafer processing tools are less technology intensive than Applied Materials' single wafer tools, recent focus on ultra-thin films has driven renewed interest in this group, DA Davidson analysts said.

The market for global thin and ultra-thin films, used in making microelectronics for mobiles and televisions, is expected to cross $115 billion by 2024 from less than $33 billion in 2015, according to a report by Transparency Market Research.

Kokusai, which counts Samsung, SK Hynix, Toshiba, and Micron among its top customers, reported revenue of $1.24 billion as of March 2018.

"AMAT needs to acquire a $1B+ revenue business to make a difference to its revenue and earnings, so this makes sense," Cowen and Co analysts wrote in a client note.

The deal would push the US company's share of the chipmaking equipment market to above 20% from 18%, according to the Nikkei, which had earlier reported on the deal.

It expects the deal to close within a year and immediately add to its adjusted earnings per share.

Shares of Applied Materials were up 2% at $45.81 in afternoon trading.

Goldman Sachs & Co served as exclusive financial adviser, and Hogan Lovells and Cleary Gottlieb Steen & Hamilton LLP served as legal counsel for Applied Materials.

© Thomson Reuters 2019