BREAKINGVIEWS-Toyota will be biggest winner in $8 bln chip deal

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Katrina Hamlin

HONG KONG, March 6 (Reuters Breakingviews) - Denso’s 6902.T potential chip deal has a third wheel. Japan's $38 billion auto-parts supplier has made a bid for Kyoto-based Rohm 6963.T, the target confirmed on Friday. Details were not disclosed and both sides have said nothing has been decided. But any deal will benefit top customer Toyota Motor 7203.T the most.

The transaction may be worth roughly 1.3 trillion yen, or $8.3 billion, the Nikkei reported, citing sources. Rohm, which specialises in power management chips used in electric vehicles and data centres, is on track to make just over $220 million in operating profit in the next financial year, according to analyst forecasts on Visible Alpha. Assuming a 30% tax rate, that implies Denso will generate a paltry 2% return on invested capital – well below its 5% weighted average cost of capital, per LSEG.

That may be one reason why Denso shares fell 3% on the news. Moreover, the strategic rationale of combining the two businesses looks weak. The auto parts supplier wants to hone the cost and quality of its products, including powertrains and electrification systems, to better compete with Chinese manufacturers, analysts at Goldman Sachs note. Closer ties with Rohm could in theory help it accomplish that.

But the pair already has a strategic partnership in place to dojust that. Denso also holds a 5% shareholding in Rohm – a common practice in Japan to strengthen business relations.

Arguably, vertical integration serves Toyota best. The $289 billion manufacturer owns a 21% stake in Denso, while other group companies hold more than 10% combined; over half of Denso’s sales are linked to Toyota group companies too, its last quarterly results show. Semiconductors have always been a weak link in automotive supply chains, so having a chipmaker in the Toyota sphere of influence could pay off for the carmaker. In recent years, the company has pushed to shore up its access to critical components.

If Denso and Rohm hitch up, Toyota will emerge in front.

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CONTEXT NEWS

Japan's Denso, a major supplier to Toyota Motor and one of the world's largest makers of auto parts, is in talks to acquire shares of semiconductor company Rohm, both companies said in statements on March 6, with each adding that nothing has been decided.

Earlier, the Nikkei reported that the “acquisition price” could reach as much as 1.3 trillion yen ($8.3 billion), citing unnamed sources.

Denso's shares closed down 3.35% at 2,034 yen on March 6, while Rohm's were up 18% at 3,243 yen. Toyota Motor's shares were flat.

(Editing by Robyn Mak; Production by Ujjaini Dutta)

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