Cree Streamlines to Expand Lighting

Last week Cree streamlined its business by divesting of its Wolfspeed business in an endeavor to expand its lighting business.

Wolfspeed, Power and RF division, which includes the silicon carbide substrate business for power, RF and gemstone applications, and was the original basis for Cree when it was incubated at NC State was sold to Infineon Technologies AG for $850 million in cash. The division was originally slated for an IPO, however, the sale accelerates the transformation of Cree into a LED lighting company and provides the company the capital for, in its terms, acquisitions.

Some interesting observations that analysts have had on the sale include:

• Wolfspeed was sold for 5x sales.  Its gross margins are 54%.  From an investment viewpoint, analysts say this will significantly dilute the gross margins of the remaining Cree organization (if you’ll recall from the Acuity quarterly earnings, their margins are in the 40s)
• After tax proceeds are expected to be $585M (the remainder of the $850M goes to taxes and deal costs)
• After the sale, Cree’s sales will be $1.44B
• After the sale, Cree will have $1B in its net cash position, leaving plenty for an acquisition.
• According to Chuck Swoboda, Cree CEO, “We target using the capital raised, combined with improved free cash flow, to fund select M&A, as well as to support additional stock buybacks.” And he refers to the sale as expediting the “transition to Cree 3.0.”

Regarding Cree’s Q4 lighting business:

• Preliminary revenue is expected around $388M
• Lighting products are projected at $197M
• LED products are projected at $160M and Wolfspeed was $31M

So, a $197M/quarter, or tracking for $700-800M LED lighting company.

And it then begs the question of what types of companies, or products, should Cree consider for an acquisition given that 1) they promote that they have the best technology and 2) their prior lighting acquisition was Rudd Lighting, which was a direct to contractor model?

Here is what Swoboda said regarding usage of the funds, ““We’re looking for complimentary products in our lighting portfolio,” he said, adding that innovations “that help the industry get where it’s going,” such as technologies in smart-connected lighting, could also be on the table. “Think of it as adding to the Cree business that’s been growing really nicely and really complimenting the overall portfolio.”

Coincidentally, and perhaps due to Cree being in the news, a regional manager inquired about Cree’s approach to the electrical channel, which many have shared with us is “challenged and inconsistent.”  Which then begs another question … “if you were Cree, what would you do to become more ‘channel friendly’ or would you continue down the path that has been developed and seek to be “different“?