Transphorm: Deal Likely Done Even If Not Everyone Is Happy (NASDAQ:TGAN)

The life of Transphorm (NASDAQ:TGAN) as an independent entity is scheduled to come to an end later in the year after coming to terms with Renesas (OTCPK:RNECF) on an acquisition of the former by the latter. The proposal still needs shareholder approval, but it valued TGAN at $5.10 a share in cash. While important players have come out in favor of the proposed acquisition, there are still some who are against the proposal for various reasons. Still, the most likely outcome is that TGAN winds up being acquired. Why will be covered next?

Renesas acquires Transphorm

A previous article from Mid-November rated TGAN a hold after concluding that even though TGAN found itself in a rather precarious position because of, for instance, the state of its income statement and balance sheet, which required TGAN to seek out periodic cash infusions to keep going, the stock was nonetheless likely to rise in anticipation of a possible proposal to acquire TGAN. Anyone long would benefit from such a proposal.

On the other hand, the article also pointed out the risk of being long TGAN. While the stock price was likely to go up, there was a risk associated with placing bets on TGAN because to do so was not guaranteed a payoff and could easily backfire. If a buyout did not show up as anticipated, the stock was likely to drop, possibly by a lot. Not only would the preceding rally have been unwarranted, but also because of the argument that the stock deserved to trade lower taking into account all the problems facing TGAN. Anyone long TGAN at that time would then suffer a haircut.

As it turned out, the stock did go on to appreciate as speculated. Furthermore, those long TGAN were rewarded when Renesas proposed a buyout of TGAN on January 11, a transaction that offered $339M or $5.10 in cash for each share of TGAN, which represented a roughly 35% premium to TGAN’s closing price of $3.79 on January 10. In comparison, the stock hit a 52-week low of $1.94 as recently as October 4, 2023, which also happens to be an all-time low for the stock as shown in the chart above. The stock closed at $4.84 on February 2.

Why the proposed acquisition makes sense for Renesas

Most semiconductor chips are made using silicon or Si. However, Si has its limitations, which can make Si less than ideal under certain conditions. For instance, Si is limited in terms of switching frequency and thermal conductivity. Si has a narrow bandgap, which is not a problem most of the time, but there are times when a wide bandgap is needed for certain applications.

This is where gallium nitride or GaN comes in with its wide bandgap compared to Si. TGAN specializes in semiconductor chips utilizing GaN. Semiconductors using GaN have a number of advantages, compared to their counterparts relying on Si only, that may be desirable in certain use cases like, for instance, greater efficiency.

For example, power semiconductors made with GaN allow for higher power levels without sacrificing performance. This attribute can be desirable in certain applications like, for instance, fast charging. High-end smartphones, for instance, are increasingly equipped with fast chargers to cut down on the time needed to charge a smartphone, which allows users to make more use of their smartphones.

Another potential beneficiary of cutting down on the time needed to charge batteries is electrical vehicles or EVs. It is not unfair to say that car owners would greatly appreciate having to spend less time to charging their EVs. This helps explain why a company like Renesas would be interested in GaN with its heavy exposure to the automotive market. In FY2022, the automotive market was the top contributor with 43% of total revenue at Renesas.

The market for GaN-based semiconductors is expected to grow at a rapid pace in the coming years. For instance, one report predicts the GaN market will grow at a CAGR of 20.5% from $10,998.5M in 2023 to $60,234.2M in 2032. The automotive market is likely to be the leading driver of growth, but the telecommunications market could be a close second since GaN has lots of potential, whether in consumer devices or wireless infrastructure.

Why the proposed acquisition makes sense for Transphorm

While the GaN market has a lot of potential, TGAN itself has yet to translate all that potential into the bottom line. As mentioned earlier, the state of the income statement and the balance sheet is such that TGAN requires periodic cash infusions to keep going. This happened as recently as June 2023 when TGAN announced a share offering to raise $15M.

According to the most recent earnings report from TGAN, TGAN had a book value of $23,691K with total assets of $34,289K and total liabilities of $10,598K after posting a GAAP loss of about $39M in the last 12 months. A look at the balance sheet shows an accumulated deficit of $229,424K, which gives you a sense of how profitable, or lack thereof, TGAN has been through the years.

If TGAN is to live up to its potential, it is much more likely to do so as part of a larger company than as an independent entity. Renesas has deep pockets, in comparison to TGAN, which can assist TGAN in making inroads into the market for GaN chips, a market that pretty much everyone agrees will grow in the coming years. The Renesas proposal has clear benefits for TGAN, especially in its current condition.

Why not everyone is likely to be pleased with the proposed acquisition of Transphorm

TGAN has appreciated by almost 150% since the October low, but this only brings the stock to where it was in early 2023 because of the drop that preceded the recent rally. The stock is still far from where it used to be not that long ago as shown in the previous chart. The stock, for instance, peaked at $9.14 in November 2021.

In other words, there are likely a lot of shareholders out there that are still underwater, even with the recent increase in the price of the stock. The proposed buyout would cover some of their losses, but not all. So there are likely to be a fair number of shareholders to whom the proposed acquisition price is not good enough. Those who managed to get in on TGAN at the lows are sitting pretty, but this is unlikely to hold true for many shareholders out there.

There are also likely those who still believe TGAN can come into its own as an independent entity, given the huge potential of the GaN market. Combine this with the above and it is not hard to imagine that there are some out there who would rather have the proposal fall through than for it to go forward.

It’s worth mentioning that KKR Phorm Investors has come out in support of the proposal, which greatly increases the odds the proposal will go through because it holds 38-39% of the outstanding common stock. If the proposed buyout receives stockholder approval and if it satisfies other closing conditions, the transaction is expected to be completed in H2 2024.

Is there a chance the buyout of Transphorm could still fall through?

The above may be why there are several attempts to perhaps scuttle the acquisition of TGAN as proposed. For instance, law firms Kuehn Law and Halper Sadeh are some of those of those who have taken an interest in the sale of TGAN. It appears there are at least some shareholders who are less than pleased with the recent development at TGAN.

However, while nothing is set in stone and the proposal acquisition has yet to be made final, the odds are in favor of TGAN being acquired. Both TGAN and Renesas want to go through with it and a very large shareholder with 38-39% ownership is in favor of the terms of the proposal. Many shareholders are likely to agree that TGAN will be worse off without the Renesas proposal.

TGAN was not doing great on its own and that is unlikely to be any different if it tries it again. If the proposal somehow does not go through for whatever reason, the stock is very likely to collapse, taking into account the circumstances TGAN finds itself in. Most shareholders would probably agree that such a course of action is not in their best interest.

Investor takeaways

Renesas has proposed to acquire TGAN for $5.10 a share, which is roughly 150% above where it traded in October at the low. Those who were fortunate enough to get in at the lows or close to it are thus sitting on a substantial gain thanks to the proposed acquisition of TGAN. Others though are likely to be much less fortunate due to how the stock has performed in recent years.

If there are attempts to derail the proposed acquisition as there appears to be, then there are reasons for it. However, if there are forces working against the proposal, then there are many more forces working to get the proposal over the finish line. While the acquisition price is arguably a disappointment, the proposal is for the best of Renesas and TGAN since both stand to benefit from Renesas acquiring TGAN.

Renesas and TGAN are a good fit and should complement each other well. The market for GaN is very likely to register strong growth in the coming years. Si chips are not enough in a number of important applications and this pushes the need for the wider bandgap that GaN provides. There are other options that have the potential to be even better than GaN, but unlike GaN, they are much further away from prime time.

A shareholder with 38-39% of all shares has come out in support of the proposal from Renesas, which will make it difficult to block the acquisition. There are very likely far more shareholders in support of letting go of TGAN than keeping TGAN because of the likelihood that TGAN shares would lose a lot of value if the Renesas proposal does not go through. Some may be willing to bet on TGAN shares making it up in the future, but not everyone will be willing to roll the dice on such an outcome.

The odds favor TGAN being acquired by Renesas since it appears there are far more supporters than detractors out there. There are those who are against the proposal as currently constituted and have initiated efforts to get a better deal, but they have to bank on Renesas having second thoughts due to something coming up about TGAN that was not previously disclosed. Other than that it is difficult to see how TGAN does not get acquired.

Bottom line, TGAN is most likely winding down its remaining time as an independent entity. If TGAN, or its technology to be more exact, is to make an impact on the GaN market, it will have to be as part of Renesas. It is simply in the best interest of the majority for TGAN to be acquired by Renesas as proposed.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.