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Newport completes Ophir deal as semicon slows

05 Oct 2011

Acquisition of the Israeli photonics company will help to insulate Newport from an anticipated down-cycle in the semiconductor equipment market.

Three months after it was first announced, Newport Corporation has completed its $230 million cash acquisition of the Jerusalem, Israel, photonics company Ophir Optronics, while also agreeing a new $250 million credit agreement with a syndicate of 14 financial institutions.

California-based Newport paid $8.43 per share to buy Ophir, which is best-known for its expertise in test and measurement equipment, and has strong exposure in the aerospace and defense sector that will complement Newport’s existing business.

Along with the acquisition of the Austrian femtosecond laser specialist High Q Laser in July, the Ophir deal will help to insulate Newport from an impending downturn in the semiconductor market, which in recent months has accounted for around one-third of Newport’s sales. As a result of that slowdown, the company has adjusted its sales expectations for Q3 2011 down from $131 million-$135 million to $124 million-$126 million.

CEO Robert Phillippy told an investor conference call to discuss the acquisition that Newport had seen a 35% drop in orders from semiconductor equipment customers in the latest quarter (compared with Q3 of 2010), in what appears to mark the onset of the latest downturn in the semiconductor industry cycle. Newport sells to a number of the top-tier capital equipment providers in the sector.

The good news for Newport is that strong order patterns in its biophotonics and scientific research markets have largely offset that decline. With less than two percent of Ophir’s sales relating to the semiconductor industry, and High Q Laser focused largely on the biomedical market, the new combination of companies should provide a much more balanced portfolio.

Ophir video: measuring laser beam quality:

“No major consolidations”
Acquiring Ophir will see 650 more employees transfer to Newport, with Phillippy identifying the key opportunities as sales growth, cost reduction and a more efficient product roadmap – rather than any consolidatory moves. “We are not planning any major facility or business consolidations,” he said.

The CEO believes that the addition of Ophir increases Newport’s total served market by some $800 million, to around $5 billion. For 2011, Ophir is expected to generate sales of around $122 million, and an operating income of $14 million. As well as serving aerospace and defense, Ophir products are widely used in the industrial laser sector, while the firm also has an emerging business in the nascent field of digital dentistry.

Reduced defense spending by governments around the world represents a key macro trend that Ophir might be expected to feel in the coming months, but Phillippy believes that photonics technologies will prove to be resilient to that expected downturn – much as has been seen in previous semiconductor industry down-cycles.

While acknowledging that defense budgets were looking “tough”, the CEO said that he expects governments to end up spending less on military personnel, and more on technologies like surveillance and unmanned aerial vehicles (UAVs). Those technologies rely on photonics expertise in the form of digital imagery, thermal cameras and night vision – all areas where Ophir stands to benefit.

New finance
Despite the positive message and the extra resilience to a downturn that its latest acquisitions should provide, Newport’s stock price has – like most – taken a tumble in recent weeks, and has just been downgraded by analyst Mark Douglass at Longbow Research.

However, that partly reflects worries about a significant hike in tax rate that the company faces in the coming fiscal year, and a lingering perception that Newport is more exposed to the semiconductor cycle than it is in reality. Douglass thinks that Newport may start to gain favor from the markets if it can demonstrate a couple of quarters of profitable performance in the midst of the expected semiconductor downturn.

The company’s new line of finance comprises a five-year loan of $185 million, plus a $65 million revolving line of credit that is currently undrawn. As well as aiding the Ophir deal, the new arrangement will be used to repay a $127 million debt in the form of subordinated convertible notes due to mature in February 2012.

Newport has agreed to repay 10% of the principal of the new loan in the first quarter of 2012, followed by 15% repayments in each subsequent year.

Summing up the Ophir acquisition and future prospects, CEO Phillippy said that the long history of revenue growth at the Israeli firm would help to deliver an excellent return to shareholders. “This acquisition expands our global footprint and further diversifies our end-market participation,” he added. “It represents an important step in the implementation of our strategy to become the world’s premier source for photonics technology and products.”

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