Summary

• Taiwan Semiconductor is exploring a JV with Intel’s Foundry business, but regulatory approvals and feasibility studies are still pending.

• Broadcom is interested in acquiring INTC’s design assets, which aligns with its strategic goals and could streamline Intel’s business.

• All deals and potential joint venture plans are still in early stages, but AVGO and TSM's re-involvement is best positioned for Intel's investors.

• Intel’s valuation remains appealing, but the stock faces pressure without further advancements in acquisition talks, maintaining a 1x book value multiple.

• I maintain a Hold rating on Intel due to ongoing uncertainty despite takeover rumors and potential joint ventures with TSMC and Broadcom.

Anton Vierietin

Investment Thesis

A month ago, I published a note about the takeover rumors swirling around Intel (NASDAQ:INTC) (NEOE:INTC:CA), which were increasingly creating an uneven landscape for Intel's investors to navigate through.

At the time, I recommended a Hold rating because I believed a JV (joint venture) or an outright acquisition would be in the best interests of Intel's shareholders. However, a choppy regulatory environment involving any deal with Intel, given the sensitive sovereign interests any suitor would be subject to, was likely to complicate the deal in the immediate term. Until last week began, Intel was down 12% since my report.

Then, last week, reports speculated a combination of a possible takeover plus a JV that catapulted Intel's stock, with Intel's investors seeing the best weekly performance in their Intel positions in over two decades, after the stock climbed ~24% last week.

Exhibit A: Intel's stock performance over the last twelve months versus the S&P 500 Index (below). (TradingView)

I have unpacked the details of the latest speculations and rumors around Intel's takeover tantrum that twists further.

I believe there is a fair bit of uncertainty that keeps me from attaching a favorable rating for Intel, leading me to reiterate my Hold rating on Intel.

Intel's Reported JV With Taiwan Semiconductor Looks Likely

Per my last report on Intel, I noted how the heads of Taiwan Semiconductor, or TSMC (TSM), and Broadcom (AVGO) had excused their companies of any business dealings with Intel.

In the latest WSJ exclusive report published last week, it seems like both these companies are back in the fray to have some sort of a deal to acquire or partner with Intel.

For Intel's shareholders, I, personally, believe a deal with either TSMC or Broadcom (or both) would be in the best interests of Intel's shareholders, resolving the deadlock in shareholder value.

Let's start with TSMC.

Last week's WSJ's exclusive report speculated that TSMC is eyeing some sort of a JV with Intel's Foundry business:

TSMC has studied controlling some or all of Intel's chip plants, potentially as part of an investor consortium or other structure, according to people familiar with the discussions.

The report also noted that Broadcom is another player interested in buying out Intel's design business, which I will break down in the next section. For now, the report states that, "Broadcom and TSMC aren't working together, and all of the talks so far are preliminary and largely informal."

There are a few things to be kept in mind for TSMC to broker the JV with Intel.

One, TSMC would need the approval of the current US administration for the JV to go through. There are reports that the Trump 2.0 administration has signaled their approval for a JV to fall through. NYT reported last week:

The Trump administration has encouraged TSMC to do the deal. Howard Lutnick, President Trump's nominee for commerce secretary, has been involved in the conversations and considers them one of the most consequential challenges of his new job, two of the people familiar with the discussions said.

Two, TSMC is currently conducting the initial stages of a feasibility analysis to examine how it can control parts or all of Intel's foundry business, as reported by all major news outlets last week. Of particular importance to TSM will be Intel's 18A process node, which specifically includes PowerVia, Intel's proprietary BPD (backside power delivery) technology.

But, assuming that the feasibility analysis hints at a favorable outcome for TSMC, the critical aspect will be the design of the business deal that needs to appeal to Intel's shareholders & employees as well as Trump 2.0.

TSMC could lead a consortium to create a JV to manage Intel's foundry assets. The NYT reported that this consortium could include a combination of PE firms as well as other tech companies, possibly semiconductor firms, that could be included in the JV.

TSMC had designed a similar deal worth $11 million in the past in Germany, with TSMC being the lead stakeholder, while other firms such as NXP Semiconductors (NXPI), Infineon (OTCQX:IFNNY), and the German multinational engineering and technology company Bosch would each secure a 10% stake in the JV.

In Intel's case, there are the additional restrictions from the CHIPS Act funding that it secured. Per a filing last year, Intel had reported that in case its foundry business does spin off, the terms of the JV should be:

• Either Intel owns "at least 50.1% of the ownership of or voting rights with respect to Intel Foundry if separated into a new legal entity ("Intel Foundry Corporation") so long as Intel Foundry Corporation remains a private company", or,

• If Intel Foundry becomes a public entity, Intel must remain the largest shareholder, and no shareholder of the JV must retain more than 35% of the resulting public JV's ownership or voting rights.

Currently, Intel's Foundry Business is a $17.6 billion revenue-generating engine, which has declined 7.2% since the previous year. The JV won't overnight change the revenue trajectory of Intel's Foundry business, but it will help in watering down Intel's debt load.

At the moment, Intel hold's $50.7 billion in debt and obligations at a consolidated level. It's difficult to say what part of that debt is due to Intel's exposure to its foundry business, but I believe a majority of the debt was used to finance Intel's foundry growth.

Broadcom Dials Back Into Top Contenders For An Acquisition

Personally, I think Broadcom moving for Intel's design assets makes the best sense for all stakeholders of Intel, Broadcom, and the US government.

For the US government, Broadcom is an American semiconductor company headquartered in Palo Alto, CA, making it relatively easier for the US government to approve of a deal with Intel.

Plus, Intel's design assets fit very well with Broadcom's ambition of growing their design business further.

Additionally, as I had noted earlier, I believe Broadcom's Hock Tan is "the balance sheet butcher" that Intel needs at the moment. Broadcom's Tan has shown extreme focus in trimming down portions of the businesses previously acquired and generating even more accretive value from the acquisitions Broadcom had made.

Case in point-Broadcom's VMware acquisition. By the end of 2023, Broadcom advised investors it was divesting VMware's end-user computing and Carbon Black business units to focus all the resources on navigating VMware towards the private/hybrid cloud market for large enterprises.

We could see something similar from Broadcom's acquisition of Intel's design assets as well, where the company keeps the Data Center & AI assets while divesting other parts of the Products business group. And it won't be difficult for Broadcom to find suitors there too. For example, Qualcomm would be more than willing to take Intel's Client design business off from Broadcom.

Valuation Still Looks Appealing For Intel But Uncertainties Persist

With the surge in Intel's stock price, Intel's board of directors would definitely have taken notice, viewing last week's stock price surge as some sort of vote of approval from investors about the takeover rumors floating in the market.

Accounting for last week's surge, Intel is valued at $102.19 billion on a pure market capitalization basis, implying a valuation that is almost at par with its book value of ~$99.3 billion or 2x projected 2025 sales of $53.5 billion, flat from 2024's sales.

Noting the reported involvement of the current US administration's officials in the Intel deal, I expect any potential acquisition to fetch at least a ~1.2x valuation, which is now 16-18% upside from Intel's current valuation, down from the 25% upside I noted last month.

Exhibit B: Intel trades marginally above the 1x valuation multiple. (YCharts)

But given the early levels of discussions of the stakeholders involved, there is still a fair amount of risk that the deal does not go through. Also, I believe Intel's 1x book value multiple will now become a sentimental valuation multiple range for the stock to trade at. So unless there are no further advancements in talks, Intel will face pressure justifying the 1x book value unless acquisition talks advance.

Possible risks of the deal not falling through are either suitors walking off or the current US administration suddenly changing their stance, as Reuters reports.

Takeaway

Intel's takeover tantrum continues to create a choppy environment for investors, with markets seeing a wave of optimism from reported deals that were being worked on for Intel's different business assets from Broadcom and Taiwan Semi.

Both these deals are reported to be in their initial stages of prospecting and feasibility, which is not enough to remove some of the uncertainty from Intel's acquisition-focused outlook.

I reiterate my Hold rating on Intel.