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Sanmina buys SCI
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July 16, 2001: 2:08 p.m. ET
Contract manufacturers merge in $4.5 B transaction, Sanmina to assume $1.5B debt
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NEW YORK (CNNfn) - Sanmina Corp. agreed Monday to acquire SCI Systems for $4.5 billion in stock, a move that will create one of the world's largest electronics contract manufacturers.
Terms of the agreement call for Sanmina to swap 1.36 of its shares for each outstanding share of SCI. The transaction values SCI at $30.11, a 20 percent premium to its closing share price of $25.17 on Friday.
Based on Monday's trading prices, the deal values SCI at about $26.87 a share.
Sanmina, which is based in San Jose, Calif., also said it will assume roughly $1.5 billion in SCI debt bringing total value of the deal to about $6 billion.
The combined company would have about $14 billion in annual revenue, and analysts agreed that the deal will bolster their competitive positions.
Although SCI, whose quarterly revenue averages around $2 billion, is larger in terms of sales, much of its business is centered in the personal computer area, where profit margins are lower. For its part, Sanmina has focused on higher-margin telecommunications products, which has given it a larger market capitalization than SCI.
The purchase, which must be approved by shareholders of both companies, is expected to close in early October.
News of the deal caused shares for Sanmina (SANM: down $2.38 to $19.76, Research, Estimates) shares to drop nearly 11 percent Monday while Huntsville, Ala.-based SCI Systems (SCI: up $1.28 to $26.45, Research, Estimates) surged 5 percent.
By joining forces, Sanmina reduces its exposure to the communications market, which has been sluggish in recent months amid an economic slowdown, while SCI will reap the benefit of increased investor interest, said J. Keith Dunne, an analyst at Robertson Stephens in San Francisco.
"Sanmina has a great reputation on Wall Street, but SCI has less investor visibility," Dunne said. "That gap should really disappear under the helm of Sanmina's management."
Dunne said he expects the merger to add about 10 cents per share to the combined entity's earnings for fiscal 2002, which he estimates at roughly 65 cents per share.
The merger will create one of the world's largest electronics contract manufacturers, with about 100 manufacturing plants in more than 20 countries. It will be competing against the likes of Solectron (SLR: down $0.37 to $15.51, Research, Estimates), the market leader, as well as Celestica (CLS: down $1.06 to $44.39, Research, Estimates) and Flextronics (FLEX: down $1.39 to $23.36, Research, Estimates).
Some analysts pointed out that buy taking SCI with its broad geographic spread into the fold, Sanmina will be able to big on larger contracts that previously was beyond its reach.
"Sanmina broadens its perception beyond being a niche player," said A.G. Edwards & Sons analyst Tony Boase. "It substantially increases its addressable market beyond communications."
During a teleconference Monday morning, executives from both companies said they expect to report financial results in line with expectations for the quarter ended in June.
Sanmina said it expected earnings of about 10 cents per share on revenue ranging between $760 million and $775 million. SCI said it expected to log a profit ranging between 26 cents and 29 cents per share on sales between $1.9 billion and $2 billion.
Overall, the two companies said they expect to cut as much as $150 million in annual costs as a result of the merger. 
-- Reuters contributed to this report.
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