To help finance its plans for factory growth, Intel Corp. INTC has formed an unusual $30 billion fundraising partnership with Brookfield Asset Management Inc. BAM, indicating that some significant investors are optimistic about the long-term need for semiconductors.
The deal with the publicly traded Canadian asset management company is the first of what might be some similar agreements Intel pursues to support Chief Executive Pat Gelsinger’s drive to establish the company as a leading contract chip maker and reclaim its manufacturing advantage over rivals in Taiwan and South Korea.
According to the agreement, which business executives hailed as a first for the sector, Intel would contribute 51% of the cost to the construction of new chip-making facilities in Chandler, Arizona, and would hold a majority stake in the financing vehicle that would be in charge of purchasing the new factories, according to Intel Chief Financial Officer David Zinsner. The remaining equity will be owned by Brookfield, and the firms will split the profits generated by the plants, he added.
Such transactions are prevalent in sectors like electricity and telecoms, according to Scott Peak, a managing partner in Brookfield’s infrastructure department, and are gradually making their way into the chip industry due to its expanding capital requirements. According to him, Brookfield, which has more than $750 billion in assets under management, believes the Intel merger fits well with the company’s background in significant and complicated transactions.
The action would prevent Intel from having to rely more on borrowing to finance its expansion, which might harm the company’s rating, according to Bernstein Research analyst Stacy Rasgon.
It would also preserve cash to let Intel continue paying dividends. Tuesday’s afternoon trade saw a small increase in the price of Intel. Even while short-term demand softness is hurting chip-sector revenues, Mr. Gelsinger and other industry leaders have stated that they anticipate annual semiconductor sales to approximately double by the end of the decade and surpass $1 trillion.
In a $20 billion expansion announced last year, Intel would build two new plants in Arizona, where it already manufactures chips. But according to Mr. Zinsner, the amount was only an early estimate, and inflation since then has increased the price. Additionally, Intel has stated that it may invest up to $100 billion in new plant complexes in Germany and Ohio.
Chips are more expensive to produce as circuitry gets smaller and smaller—to the diameter of a human hair—in increasingly sophisticated chips. According to Boston Consulting Group research, a large, modern chip facility can cost more than a modern aircraft carrier or nuclear power station today.
The ambitious goals of Intel have dampened investor confidence. Its share price fell more than 45% on Monday, compared to an 8% decline in the PHLX Semiconductor Index since Mr. Gelsinger revealed his intention to start a semiconductor company last year.
The company has also been hurt by manufacturing errors and a decline in demand for personal computers, which use its processors, following a spike in purchases during the pandemic. Intel reported a deficit for the second quarter and a significant decline in sales.
Intel is relying on financial assistance from the government. Political figures in the U.S. and Europe have expressed a desire to boost domestic chip production and halt the industry’s move to Asia, where manufacturing has historically been less expensive.
According to Boston Consulting Group, the United States share of the global chip market has decreased to roughly 12%. This month, President Biden signed legislation authorizing more than $50 billion for domestic semiconductor manufacturing and research. Chipmakers like Intel and others actively advocated for the legislation. By 2030, the European Union wants to double its market share in the production of chips to 20%.
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