GT Advanced Technologies Inc fka GTAT

[lecorb]

GT Advanced Technologies Update: Beginning Of The End For Chapter 11 Process


•GTAT's deal with Apple secures the Company's future and sets the Company on the path to exit Chapter 11.
•In what appears to be an admission of problems at its end, Apple's claims are limited to a percentage of Mesa furnaces and primed by up to $150M of exit.
•We believe GTAT debt is a sure shot winner and the equity has a strong chance of surviving and prospering.

It has been a dramatic day in the court for GT Advanced Technologies (NASDAQ:GTAT) (OTCPK:GTATQ). As we expected, much of the real action for GTAT took place outside of the courtroom - in negotiations with Apple (NASDAQ:AAPL).

As we have written in the past about this particular bankruptcy (see here and here), this is not a typical bankruptcy and the battle was more about what was outside the balance sheet.

The most important off balance sheet issues, in the form of Apple contracts, now appear to have been resolved. The details of the deal are still not final and not fully in the open but judging from court filings and news articles the following appears to be the agreed upon framework:

- GTAT/Apple will agree not to disparage each other (this is standard for most contracts nowadays so no surprise here)

- GTAT will revise the explanation for its surprise bankruptcy filing

- Apple aims to erase the public record of what went wrong between Apple & GTAT (We believe there should be securities laws that prevents this kind of secrecy!)

- GTAT will wind down the sapphire operation at Mesa rent free for a period of 1 year

- There are over 2000 furnaces at Mesa, each valued at about $500K which GTAT will sell over time and Apple will get a percentage of the sales. Apple's monetary claim appears to be limited to a percentage of the sale of equipment at Mesa. (i.e. no claw back into other GTAT assets)

- GTAT has the rights to all of GTAT's intellectual property

- Mutual release of all claims between GTAT and Apple

- Apple may be primed by DIP financing on Mesa assets up to $150M

The settlement details are still to be nailed down but the above terms appear to constitute the key elements of the settlement. From a GTAT stakeholder perspective, it was imperative that the cash burning Mesa facility be shut down - especially if Apple is not planning on using sapphire for iPhones. Winding down the facility and limiting claims is a big victory for GTAT's shareholders as the biggest debt on the balance sheet evaporates and the associated cash burn disappears leaving GTAT a much healthier Company.

While the details are still in flux, we believe that GTAT will be able to land the necessary DIP financing and there will not be any significant liquidity issues. We also find it likely that the convertible debt holders will agree to reasonably amend the cross default clauses. With DIP financing, cash from sapphire boule sales from inventory, cash from percentage of Mesa equipment sales, and product sales from other GTAT products, we do not see much of a reason for GTAT to continue in bankruptcy for more than about a quarter. Once the short term issues are resolved, we predict that GTAT will exit the bankruptcy process with a healthier balance sheet. All things considered, one of the most unusual bankruptcies of our time may be coming to a rapid end.

Over the next few weeks, if GTAT can generate sufficient near term cash flow and renegotiate the cross-default clauses with the creditors amicably, which we believe is likely, we predict that the equity is likely to survive this process. However, given the stigma of bankruptcy and the limitations of working capital for the near term, we expect hindrances to GTAT revenues and growth in other product areas. In this post Chapter 11 context, we believe that our earlier sum of parts valuation needs to be revised to arrive at a new valuation. On a preliminary basis, we believe it is likely that the equity will climb back to the pre-Apple levels as the company gets out of its bankruptcy.

Investment Thesis:

Post Apple settlement, we see little risk to convertible debt and believe GTAT bondholders are likely to go unscathed. GTAT bonds CUSIP ID GTAT3908991 and GTAT4078167 would be strong buys at the current levels.

It is impossible to value the equity reasonably at present without additional details from the Company on the balance sheet situation as well as Q4 and 2015 updates. However, being short the stock at this point may be foolhardy. We see the equity as a speculative buy.

Related implications:

With over two thousand state of the art sapphire making furnaces arriving in the market at potentially steep discounts, we believe that the sapphire equipment market is likely to be flooded with excess capacity for the foreseeable future. The furnaces at Mesa are cutting edge technology that have not been available to other customers due to Apple exclusivity. Consequently, we expect GTAT to be able to unload a significant fraction of these furnaces into the market albeit at distressed levels. In this context, we would avoid all sapphire related players for the next twelve months. These include Rubicon Technology (NASDAQ:RBCN) and Sapphire Technology Corp (123260:KOSDAQ).

As a related matter, we estimate that the sapphire boule inventory at Mesa is likely between $20 and $60 million. It is unclear if Apple will be using all or part of this large sapphire boule inventory. If Apple has limited or no use for this product, then there will be a glut of large size sapphire boules in the market in the near term. In this context, we would stay away from any sapphire producer for at least a couple of quarters.

On the upside, we expect a significant downdraft in sapphire and LED prices in 2015 and would be bullish on LED suppliers and others who can benefit from low cost sapphire.

http://seekingalpha.com/article/2582315-gt-advanced-technologies-update-beginning-of-the-end-for-chapter-11-process?app=1&uprof=44