AMD spins off plants into venture with Abu Dhabi

By David Lawsky

SAN FRANCISCO (Reuters) - U.S. chip maker Advanced Micro Devices Inc plans to spin off its manufacturing plants into a $5.7 billion joint venture with Abu Dhabi to get a cash injection and shrink debt to better compete against larger rival Intel Corp.

AMD's shares jumped 18 percent to $5 on the news on Tuesday after Wall Street waited for months for the struggling chip maker to formulate its so-called "smart asset" strategy to focus more on chip design and less on costly factories.

Advanced Technology Investment Company (ATIC), an Abu Dhabi state-owned venture capital firm, said it will invest $2.1 billion for a 55.6 percent stake in the venture, of which $700 million will go directly to AMD, which will hold the remaining stake. The two will divide the venture's board seats equally.

ATIC also committed to investing another $3.6 billion to $6.0 billion over 5 years to fund the venture's expansion. The 3,000-person new company will hold AMD's two plants in Dresden, Germany and make all of its central processing units, as well as chips for other companies.

Another Abu Dhabi government company, Mubadala Development Co, will spend $314 million to increase its stake in AMD to 19.3 percent from 8.1 percent and gain a seat on AMD's board.

Brian Mata, an analyst at IC Insights in Arizona, said AMD desperately needed the boost. The company has posted seven consecutive quarters of losses and is forecast by Wall Street to report another quarterly loss next week.

"The key thing is the financial backing from Abu Dhabi because AMD was essentially out of money," said Mata.

He said AMD can focus on design and has the money to try to catch up with Intel, but the new venture has a challenge competing with existing contract chip manufacturers.

"The foundry business is already pretty entrenched," he said, citing Taiwan Semiconductor Manufacturing Co Ltd, United Microelectronics Corp, Singapore's Chartered Semiconductor Manufacturing Ltd and China's Semiconductor Manufacturing International Corp.

GOING FABLESS

AMD has lost market share to Intel and in the last few years was forced to weigh the price of its pride in owning the semiconductor fabricating plants, or "fabs," which most other chip makers gave up long ago.

It has also been hit by problems with its high-end personal computer and server Barcelona chip, and had bumps along the road after acquiring graphics chip maker ATI.

Despite the jump in AMD's share price on Tuesday, the stock remains far below its 12-month high of $14.73.

"Today is a landmark day for AMD, creating a financially stronger company with a tightened focus," Dirk Meyer, president and chief executive officer of AMD, said in the statement.

The new venture, temporarily called Foundry Company, will assume all $1.2 billion of AMD's manufacturing operations debt so the remaining company can compete hard against Intel, which sells about 80 percent of the central processing units at the heart of the world's 1 billion PCs. AMD makes the rest.