Intel: Raising Cash Through Mobileye

Summary:

• Intel plans to sell 35 million Class A common shares of driver-assistance technology company Mobileye, potentially raising over $1.65 billion.
• The sale will help improve Intel’s balance sheet, which has been impacted by plunging revenues and high capital expenditure.
• Intel will still hold a majority of Mobileye shares, showing its continued faith in the company’s growth prospects.

Back in late April, I detailed how chip giant Intel (NASDAQ:INTC) had shown some progress with its Q1 earnings report. Both top and bottom line results were not as bad as previously feared, and guidance was a lot better than we had seen in recent quarterly reports. One area where the company needed to improve, however, was its balance sheet, and on Monday, Intel announced a move that can certainly help with that situation.

After the close on Monday, it was announced that Intel would be selling a small part of its stake in driver-assistance technology company Mobileye (MBLY). The secondary public offering is for 35,000,000 Class A common shares, with underwriters getting an option for another 5.25 million shares. Mobileye is not selling any shares in the deal, so it will not receive any proceeds.

As Intel investors know, the company is the majority owner of Mobileye. At the end of Q1 2023, Intel owned 750 million Class B shares of Mobileye. Each of these Class B shares can be converted into an equal amount of Class A common stock. As of April 1st, according to the most recent Mobileye 10-Q filing, there were just under 52 million Class A shares outstanding. If the underwriters do in fact exercise their option, Intel will be selling a little more than 5% of its stake.

On the news of the Intel sale, Mobileye shares ticked down 3% in Monday’s after-hours session, finishing at $41.10, which just happens to be right around the stock’s 50-day moving average. At that price, assuming the underwriter’s option is exercised, Intel would be raising a little more than $1.65 billion before fees. The 52-week range for Mobileye shares is $24.85 to $48.11, so Intel would be selling towards the upper end of the yearly range. Wall street analysts do see some upside for Mobileye from here, with an average price target near $47, which would be good for Intel when it likely sells some more shares in the future.

With Intel revenues plunging in recent quarters and the company swinging to GAAP losses, while also spending heavily on capital expenditures, cash burn has quickly piled up. In Q1, adjusted free cash flow was a negative $8.76 billion, which followed last year’s burn and resulted in the slashing of the stock’s dividend. At the end of the March period, Intel had $27.5 billion in cash and short term investments on the balance sheet, but the company also had over $50 billion in total debt.

The ability for Intel to get back to the high profitability it once had has been reduced in the short term by this large debt pile. While the company can earn some interest income thanks to rising rates, numerous debt offerings in recent years have added more interest expenses. By monetizing a small stake in Mobileye, basically at a valuation that’s twice what Intel paid for the firm several years back, Intel can avoid diluting its own investors or adding more interest expenses that would hurt the profitability and cash flow turnaround.

Intel still will hold a majority of Mobileye shares for the indefinite future, so it still believes in the future of the company, which is expected to grow revenues quite substantially in the coming years. In the graphic below, you can see current Mobileye revenue estimates moving forward, with the top line expected to more than double from this year to 2026. In Q1 of this year, Mobileye was the only Intel business segment to show revenue growth over the prior year period, with the $458 million figure being up 16%.

In the end, Intel has decided to raise some more capital, this time through the sale of a small part of its Mobileye position. With the chip giant’s balance sheet taking a hit as revenues plunge and capex spending is high, a little extra cash is certainly welcome. Recent debt sales have been several billion in total, so this $1.5 billion rise probably is easier to complete and doesn’t come with added interest expenses. Intel still has tremendous faith in Mobileye, which is expected to grow quite nicely in the coming years and will retain a majority of its ownership at a valuation that’s roughly twice what it acquired Mobileye at.

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