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Intel’s deal with Brookfield will give it majority ownership of two new chip factories.
Courtesy Intel Corporation
Intel is turning to financial engineering to fund its chip-making ambitions.
On Tuesday, the company announced a definitive agreement with an affiliate of
Brookfield
Asset Management to jointly invest up to $30 billion for two “leading-edge” chip factories in Chandler, Ariz. Under the terms of the deal, Intel will pay for 51% of the project, while Brookfield will fund the remaining 49%.
Intel
(ticker:
INTC
) will get majority ownership and operating control of the two factories, which can be used for Intel’s own products or for its foundry customers, it said in a news release. The transaction is expected to be completed by year end.
Intel believes the partnership will provide a $15 billion cumulative benefit to its adjusted free cash flow over the next few years, while the factories are built and production ramps up.
Intel shares rose 0.8% to $34.12 in early trading Tuesday, while the
S&P 500
was marginally higher.
On a conference call with Wall Street analysts, Intel’s management said Brookfield will get a share of the cash flows from the factories once they are operational. The company said the overall cost of the funding deal will be higher than the cost of debt, but below the cost of equity for Intel, adding it should be roughly between 4.4% and 8.5%.
“Our agreement with Brookfield is a first for our industry, and we expect it will allow us to increase flexibility while maintaining capacity on our balance sheet to create a more distributed and resilient supply chain,” CFO David Zinsner said in the release.
Intel is coming off a rough quarter. Last month, the company posted June-quarter financial results that fell far short of Wall Street estimates. At the time, it also provided a bleak outlook for the current quarter and significantly reduced its forecast for the full year.
The company blamed a deteriorating macroeconomic environment but also said some of its woes were self-inflicted due to product-execution issues. Earlier this year, an Intel executive revealed that production of its next-generation server processor would ramp up later than it planned because the company needed more testing time.
The company has undertaken an aggressive turnaround strategy. It is expanding its foundry business and has laid out a bold road map for future products.
The deal with Brookfield moves the plans closer to fruition, at the cost of some future financial upside.
Write to Tae Kim at tae.kim@barrons.com
