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Qualcomm at $70/Sh Can Be Like Hock Tan’s Other Deals, Says RBC

Remember that today’s speculation follows Broadcom yesterday announcing it intends to “re-domicile” to the U.S., which was seen by many as simply a way to clear regulatory objections to making U.S. acquisitions; Broadcom is domiciled in Singapore currently. It already has one deal pending, for Brocade (BRCD).

RBC Capital’s Amit Daryanani, who rates Broadcom shares “Top Pick,” and who yesterday raised his target on it to $300, today sounds a positive note: this could be just like all of Broadcom CEO Hock Tan’s other deals, like the 2016 Broadcom deal itself, where he cuts costs and boosts margins.

Writes Daryanani “our analysis shows the deal could be materially accretive and be well received by AVGO shareholders."

Daryanani thinks Broadcom can improve its own earnings by better than "if AVGO can bring QCOM op-margins inline to their at 40% (AVGO has 4% GG&A vs. QCOM at 15%."

Remember Qualcomm is locked in a legal battle with Apple (AAPL), which is also a big customer to Broadcom.

That legal business could be wrapped up more quickly with Broadcom in control, he muses; remember that "AAPL signed a 3 year contract on RF components with AVGO,” he writes.

He thinks Broadcom only wants Qualcomm, not NXP Semiconductors, which Qualcomm’s been trying to acquire for the past year; he also thinks Broadcom doesn’t want the licensing business, known as “QTL”:

We think AVGO would want to acquire QCOM assets not NXPI (QCOM is in the process of acquiring) – logically, we think AVGO would have waited for QCOM/NXPI deal to close before making a bid otherwise, 4) We see better synergies in just acquiring QCOM QCT assets vs. QTL, though you need to resolve the litigation issues if you want to monetize QTL, 5) The onus will be on QCOM if they want to engage here or focus on NXP transaction and 6) QCOM/NXPI break- up fee is $2.0B. Net/Net: We think this deal fits AVGO’s strategy and could be a material catalyst to enable sustained EPS/FCF upside ($25+ EPS potential 2-3 years out with the deal). We think AVGO could take leverage to ~3.5x while maintaining investment grade rating and ensuring double digit accretion.


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