Citi Restates Buy Rating On ON Semiconductor

Citi analysts believe the agreement of NXP to dispose its Standard Products business to a Chinese consortium for $2.75 billion won't have a meaningful impact on ON Semiconductor Corp ON. According to Citi, NXP’s Standard Products business is similar to ON’s Standard Products Group, which constitutes almost 35 percent of ON’s 2015 revenue.

Citi provided two reasons why the deal won’t affect ON’s business:

• CFIUS won’t permit the sale, taking into account that it stopped Fairchild and other deals to the Chinese. For example, Fairchild declined an offer from China Resources Microelectronics Ltd. and Hua Capital, stating the high probability of the deal being rejected by CFIUS.
• Even in the case of the successful deal, the effect on ON’s business won’t be material, as many customers will abandon NXP because of IP issues. In addition, ON’s standard product business has higher gross margins (approximately 220 bps) than NXP, which implies higher quality and higher barriers to entry. The estimated operating margin of ON’s standard product business was 21 percent in 2015, almost equal to NXP Stand Products’ 21.1 percent.

Citi kept its price target on ON’s stock unchanged at $12, taking into account the 10x multiple and estimated EPS of $1.20 for the 2017 calendar year.