GT Advanced Technologies Inc fka GTAT

[lecorb]

GT Advanced Technologies: Potential Value To Current Shareholders Is Still Murky At Best
Oct. 10, 2014 1:05 PM ET
Late Thursday evening, GT Advanced Technologies (NASDAQ:GTAT) filed an emergency motion to wind down both operations and the employee incentive plan at its sapphire growing facilities. In addition, it is seeking authority to reject certain executory contracts and unexpired leases.

In simple terms, GTAT wants to exit the business of manufacturing sapphire. The next court hearing, at which these motions will be reviewed, is scheduled for October 15th at 2PM ET.

GTAT will not be disclosing to the public what led to its bankruptcy filing. The judge overseeing the case ruled that Apple (NASDAQ:AAPL) and GTAT can keep the details of their arrangement confidential. The judge also authorized the sealing of court papers explaining what went wrong in the financing and supply agreement with Apple.

The sealing of the case tells us a few things. First, GTAT is being respectful and playing well with (at least some) others, including its largest creditors. GTAT has a financial incentive of $50m to keep Apple's secrets confidential, and it is acting on that incentive, which may benefit its creditors. Its behavior in the legal proceeding shows respect of Apple's privacy and may keep the relationship on a somewhat stable footing. It would seem GTAT is trying to exit its business with Apple as cleanly as possible.

One interesting tidbit emerging from Thursday's hearing is that holders of more than 4.75% of the stock are restricted from trading it. These include Wellington Management, Blackrock Institutional Trust, Systematic Financial Management, Vanguard Group and Fidelity Management.

I've spent considerable time perusing news articles, speaking with the WSJ and discussing possible options for GTAT shareholders with bankruptcy lawyers. Some readers have asked whether it makes sense to buy GTAT as a speculative play. It goes without saying that there is far too much uncertainty now for me or anyone else to make such a recommendation.

A Comment From GTAT About Shareholder Losses

GTAT's attorney did make a public statement regarding the loss of shareholder value:

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"The company feels terrible about the loss of value and we will work every day, 24/7, to try to recover that value."

Aside from observing that the terms of this promise make it literally impossible to keep even if the company wants to, we can consider what it may actually mean. Is the company tipping its hand that it intends to exit bankruptcy with current shareholder equity intact? If that is its intention, are there legal means for it to do so? Given the inconsistency thus far between GTAT's words and its actions, can we believe it has the ability (legally, financially or operationally) to stand behind any of its statements? I am thinking here of its promise to explain to shareholders the reasons behind the bankruptcy, followed quickly by a motion just hours before the hearing to seal that information from the public.

We Need Clarity About Mesa Before We Can Assign Any Value To GTAT As A Speculative Bankruptcy Turnaround Play

Outside the Apple sapphire materials business, GTAT does have operations that can generate sizable revenue and earnings. Will they emerge from the bankruptcy to see the light of day, or will they be liquidated? If GTAT does emerge from bankruptcy, will current shareholders hold any equity? We don't know the answer, but we do know the odds are against us. How the court treats the assets at Mesa is key.

If GTAT winds down the plant, what happens to the equipment and inventory? GTAT owes Apple $440m and has other creditors besides. Will Apple will take possession of the equipment and try to run the Mesa facility? This will depend in part on whether Apple is committed to sapphire screens for its future products. Apple has told the WSJ that it wants to preserve jobs in Mesa but has made no distinction as to who might be the employer. Since GTAT plans to wind down the facility and Apple does not manufacture materials and components, this may just be a weak stab at public relations, but it may be that Apple will try to force GTAT to keep the facility running.

GTAT's 700 employees at the Mesa facility have ostensibly learned a thing or two about growing and fabricating sapphire. Is it possible that Apple would take over the plant but contract the work to GTAT? Since there are still yield issues to overcome, this would make more sense than letting it go dormant and trying to ramp it back up in the Spring. It would also incur considerable costs, however, and Apple is already in the hole on this deal.

Without answers to these questions, we can only guess whether GTAT will exist after bankruptcy. With court proceedings sealed, we may receive little more clarity for some time to come. One imagines that details will leak, especially about the status of employees. For what little good a full parking lot did to inform our thesis, an empty parking lot will be a sure sign indeed.


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