PARIS Israeli chip maker Tower Semiconductor Ltd. (TSEM.O) (TSEM.TA) would prefer to raise debt, not equity, to fund a planned expansion at its Fab 2 plant, the company's chief executive said on Thursday.
"I certainly don't want to dilute at $1.80 a share," Russell Ellwanger said at the Reuters Global Technology, Media and Telecoms Summit in Paris, referring to Tower's share price.
"Our preference would be to try to do some type of a debt vehicle," he said, adding that such debt could quickly be serviced from the gain that expansion would bring.
Tower, a small player in a $20-billion-a-year chip industry, has carved out a niche as a specialty maker of image sensors used in the fast-growing market for medical and dental x-rays, mobile phone cameras and digital cameras, as well as radio-frequency chips and embedded memory chips.
Tower is currently completing an expansion at its Fab 2 plant in northern Israel, which has brought capacity to 24,000 wafers per month from 16,000. It is eventually looking to expand to 40,000 wafers a month but has no solid plan yet.
"We do have demand beyond our present capacity and hence that demand will result in capacity expansion," he said. "Long-term debt, short-term debt, there's a whole variety of things one can go after."
Tower recently restructured its $530 million in bank debt, converting $160 million into equity. The remaining debt starts to be repayable in the second half of 2009.
Noting that Tower has a positive cash flow, Ellwanger said it estimated incremental revenue from the expansion would bring a margin of 65 percent, though even a margin of 55 percent would allow the debt to be serviced easily.
Ellwanger said he was targeting a production cost of less than $12 million per 1,000 wafers, versus $16 million per 1,000 wafers in its recent expansion, so a $120 million investment could bring an annual return of about $72 million.
"I would believe that investors would be very excited about a model like that," he said.
Tower has so far worked with older technology that makes chips with circuits 130 nanometers to 350 nanometers wide, while the largest chipmakers are rolling out 65-nanometer technology.
Tower expects to begin making 90-nanometer chips by the second half of 2008. Ellwanger said the next capacity ramp-up will be for this 90-nanometer phase, which will allow the company to grow substantially.
"We're not doing any capital expenditure without having a demand that's already speaking to the equipment," he said.
Tower's largest shareholder is holding company Israel Corp. (ILCO.TA) with a 27 percent stake on a fully diluted basis. Other shareholders include flash memory maker SanDisk Corp. SNDK.O -- also its largest customer -- and Taiwan's Macronix International Co. (2337.TW) MXIC.O.