Is Western Digital On Board With A SanDisk Buyout?

• Shares of Western Digital Corp. WDC have decline 25.4 percent year to date, hitting a low of $68.25 on September 28.
• Amit Daryanani of RBC Capital Markets has maintained an Outperform rating on the company, with a price target of $94.
• Daryanani believes that a potential deal with SanDisk Corporation SNDK, which could be done via cash plus debt, might result in 20 percent accretion.

Analyst Amit Daryanani mentioned that Bloomberg had released an unconfirmed report that SanDisk had hired an investment bank to “explore a potential sale and has received bids from two rivals,” Micron Technology, Inc. MU and Western Digital.

Daryanani believes that the deal would make both strategic and financial sense for Western Digital, although an approval from Toshiba might be needed before any deal could be finalized.

According to the RBC Capital report, “With the recent cash infusion at WDC from Tsinghua group, we note that the transaction would be accretive by 10-20 percent in CY16E assuming 10-20 percent OPEX reduction of core SNDK OPEX and 6 percent interest rate on new debt.”

Daryanani believes, however, that before any deal could be struck, Western Digital would need to gain confidence in SanDisk’s 3D NAND capabilities, although the transaction would “solve WDC's long-term NAND narrative.”

On the other hand, there could also be some risks associated with the acquisition, such as “HDD companies have come a long way from hyper competition to duopoly, getting in NAND is going back to hyper competition and cyclicality.”

Also, with most of SanDisk’s manufacturing being done by Toshiba JV, the latter had the right to refuse any such deal.