High-tech glass maker Corning has found a smashing way to grow. The company is taking full control of its South Korean LCD glass display unit from Samsung and other minorities for $2.2-billion (U.S.). Samsung gets a chunk of the Gorilla Glass maker and a long-term partner to produce needed high-tech materials. And Corning strengthens its position against its rivals on the cheap.
The joint venture mostly focuses on making glass for flat-screen TVs, a market that appears to have reached maturity in most developed countries. On top of that, the unit is restricted to supplying LCD glass in South Korea. That has created an awkward position for Corning – while the LCD business’s factories had excess capacity, the company planned to build another plant in China to meet demand there.
Buying out minorities means Corning can run the plant full tilt, export some of the product and reduce capital expenditure. The factories can also be used to produce other products – including its Gorilla Glass, which is used in various companies’ mobile devices. That should improve Corning’s ability to compete against rivals like Asahi.
What’s more, the deal to buy the 43 per cent of the joint venture it doesn’t own is cheap. Assume the unit makes $1-billion this year, annualizing results from the first half of 2013. That means the price works out to 4.4 times earnings, before including the $100-million or so of synergies Corning expects to find. That’s way below the 13.5 times estimated 2013 earnings Corning trades at.
Moreover, Samsung agreed to take its compensation in the form of debt that cannot be converted into stock until 2020, and at a 30-per-cent premium – no wonder the market value of Corning rose 10 per cent on the news.
While Samsung gave on price, it gained longer-term surety over its supply chain. The two companies signed a 10-year agreement over LCD glass supply and say they will announce further partnerships involving more advanced materials soon. That should guarantee Samsung gets first dibs on the huge amounts of defect-free, difficult-to-produce parts it needs for its devices. That’s worth paying up for – and leaves Corning with more than enough room to expand.