Mixed feelings after Imagination Tech rally

It’s taken a while, but a takeover of Imagination Technologies (IMG) has moved a step closer following a bid from Californian private equity Canyon Bridge, backed by Chinese money.

The chip company confirmed it had accepted an offer of 182p per share, valuing the UK business at around £550 million. The deal is subject to shareholder approval, and not all of them are happy.

Imagination put itself up for sale three months ago after its main customer, Apple (AAPL), said in April it would stop using its technology. That news wiped three-quarters off IMG’s market cap. Two months later it admitted it was in talks with a number of parties over a possible takeover.

Any deal had been conditional on the UK techie offloading its MIPS business, which produces processors embedded in microcontrollers. Today, IMG confirmed it had agreed to sell this division to Silicon Valley-based venture capitalist Tallwood for $65 million (£48 million) in cash. The MIPS deal should complete by October, and the takeover a month later.

The offer from Canyon Bridge, backed by state-owned Chinese fund Yitai Capital, came late Friday and IMG shares opened 37% higher Monday at 177p, just below the bid price, as you would expect.

“The bid price of 182p looks a good outcome considering the underlying business is structurally unprofitable without Apple royalties,” argues Investec analyst Roger Phillips.

Many speculators who bought Imagination following the Apple exit, when the shares traded at under 100p, will be deep in the money. Long-term shareholders, or those that bought during the second half of 2016, will be less pleased. The shares traded near 300p in March. And it looks like those loyal investors are set to be disappointed.

“There is no explicit process here for blocking a deal”, says Phillips. “Overall, the deal looks reasonably safe as structured, but nothing is ever simple with Imagination.”

And he’s right to include that final risk warning. While brokers remain confident it will go ahead, Donald Trump has already blocked Canyon’s attempted acquisition of American firm Lattice Semiconductor.

There are also rumblings of discontent in the UK media and political establishment similar to criticism levelled at last year’s acquisition of ARM Holdings by Japan’s Softbank.

For this reason, N+1 Singer says it would not discourage investors from taking advantage should the shares trade near the offer price in the run up to the expected completion date.

Many shareholders listened, it seems, as Imagination’s share price dipped as low as 164p. However, Singer notes the terms of the acquisition have been designed to minimise the political risk. And Phillips admits counter-offers from Softbank, Intel, Qualcomm or Apple are not out of the question.

This story may have further to run.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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