Cotco is a supplier of high brightness LEDs (light emitting diodes) in China. Cree will gain access to this lighting market and a low-cost manufacturing platform through Cotco's factory in China. Cree will also leverage its expertise to offer more value-added products for high performance LED screens, signage and solid-state lighting.
Cree will pay Cotco Holdings $70 million in cash and Cree stock valued at $130 million, based on the average price over the previous 20 trading days. A further consideration of up to $125 million is payable, linked to the Cotco business achieving specific financial targets over the next two fiscal years. The additional consideration may be paid in cash, shares or a combination of the two.
For fiscal 2006, Cree had revenues of $423 million (a 10% increase over fiscal 2005) on which it earned net income of $76.7 million (down from $91.1 million for fiscal 2005). When it declared results in August 2006, Cree said it planned to expand its business by leveraging strengths in LED chip and materials technology.
Financial data for Cotco, which is closely held, was not disclosed. Cree said the acquisition will increase revenues by 15%-20% and earnings per share by 5%-10% for fiscal 2008, over current estimates. Analysts estimated Cotco had sales of around $100 million for the last fiscal year. In a conference call on March 13 to explain the acquisition to analysts, some expressed concerns that the acquisition could put pressure on Cree's gross margins. Cree did not break out Cotco's margin structure saying only the combined entity will maintain financial targets.
Chuck Swoboda, Cree chairman and CEO, says: "The acquisition is the next step in our strategy to enable the solid-state lighting revolution."
Cotco Holdings has agreed not to sell or transfer any of the Cree shares it receives at closing until one year after the closing date. After one year, Cotco Holdings may sell or transfer up to 50% of the shares and after two years it can exit the entire investment.
Cree manufactures semiconductors and devices for solid-state lighting, power and communications products. It has developed significant expertise in specific materials and its customers range from lighting-fixture makers to defense-related federal agencies.
Cotco is an Asian LED manufacturer with expertise in high brightness LED lamps. Its China production base is equipped with state-of-the-art equipment and facilities. Cotco caters to full colour video screens, information signs, traffic signals, automotive lighting and specialty lighting applications. Cree and Cotco have worked closely over the last 10 years since Cotco was incorporated. Cotco is a customer of Cree, currently accounting for around $25 million of revenues.
Swoboda described Cotco to analysts as "Asia-centric and China-dominated" and said Cotco's strong market position in China and its complementary product portfolio were drivers of the deal.