{ "docId": "019f6b8f-1424-7414-9277-c50c403d931a", "docSlug": "jarvis-elliott-management-western-digital-letter-may-2022", "documentTitle": "Elliott Management Western Digital Letter May 2022", "authorId": "elliott-management-western-digital-letter-may-2022", "authorName": null, "documentKindSlug": "document", "documentKindLabel": "Document", "sourceTypeSlug": "independent_analyst", "sourceTypeLabel": "Independent analyst", "presentationDate": "2022-05-01 00:00:00", "orientation": null, "aspectRatio": null, "pageNumber": 12, "pageCount": 13, "prevPage": 11, "nextPage": 13, "slideType": "key_messages", "function": "present_solution", "density": "overcrowded", "nDataPoints": 12, "notes": "This is a text-heavy slide presenting an activist investor's (Elliott) proposal for corporate restructuring and capital allocation.", "elementsJson": null, "metadataConfidence": 0.95, "imagePath": null, "slideHref": "/slides/019f6b8f-1424-7414-9277-c50c403d931a/12", "deckHref": "/decks/019f6b8f-1424-7414-9277-c50c403d931a", "deckJsonHref": "/decks/019f6b8f-1424-7414-9277-c50c403d931a.json", "deckAnchorHref": "/decks/019f6b8f-1424-7414-9277-c50c403d931a#slide-12", "components": [ { "bbox": { "h": 0.18, "w": 0.78, "x": 0.11, "y": 0.09 }, "kind": "paragraph", "text": "We also have the benefit of SanDisk’s trading history as an independent public company prior to Western Digital’s acquisition. Before the transaction announcement, SanDisk generated $1.2 billion of operating profit on $6 billion of revenue and was valued at an enterprise value of $12 billion. Since then, the NAND flash industry has continued to grow, and Western Digital’s Flash business now generates $10 billion of revenue with strong gross margins. This scale, in conjunction with the differentiation of its two-decade partnership with Kioxia, would position the Flash business for success as a standalone company once again.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "0c1ea981-eda2-4814-9a1e-c8499f00e65c", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.11, "w": 0.78, "x": 0.11, "y": 0.57 }, "kind": "paragraph", "text": "With Western Digital’s decision to withdraw its dividend, the Company has de-levered to less than 1.4x credit-agreement EBITDA (and 0.9x on a net debt basis). This de-leveraging since the SanDisk acquisition provides flexibility for the potential capital structures of the HDD and Flash businesses. In conjunction with our proposed $1+ billion equity investment, we strongly believe that both businesses would have conservative capital structures to fund organic investment and the ability to initiate a new capital-return program for shareholders.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "3fc7456e-7910-4d3e-9f8e-265c7c040656", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.09, "w": 0.78, "x": 0.11, "y": 0.28 }, "kind": "paragraph", "text": "Based on our review of precedent transactions, the trading history and our perspectives on the NAND industry over the next several years, we believe Western Digital’s Flash business can be worth $17 to $20 billion, or 1.5x to 1.75x 2023 revenue. We believe there could be meaningful upside to this valuation based on the long track record of synergy realization in analogous consolidation transactions within the HDD and DRAM industries.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "7323c66b-2559-4ba6-a644-b957b1e246d8", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.78, "x": 0.11, "y": 0.41 }, "kind": "paragraph", "text": "To demonstrate our own conviction in the value of a standalone and focused Flash business (“FlashCo”), Elliott is proposing to invest $1+ billion of equity capital into FlashCo at the same valuation range of $17 to $20 billion with proceeds to be used for continued growth and the next generation of manufacturing facilities. This capital could be utilized either in a spin-off transaction or as equity financing in a sale or merger with a strategic partner. We would welcome the opportunity to make this direct investment, as we believe the need for future NAND capacity is attractive and can generate strong returns. In addition, we believe there are likely other strategic and financial parties who would have an interest in participating in a transaction as well.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "d9a8caf6-3817-4515-b51d-42dc6eb096ca", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.13, "w": 0.78, "x": 0.11, "y": 0.72 }, "kind": "paragraph", "text": "We believe the value opportunity at Western Digital is uniquely compelling. While both business units experience cyclicality in demand and pricing, we believe they both can continue to grow with their markets and generate solid profitability and free cash flow over the next several years. In the analysis below, we illustrate the path to $100+ per share by the end of 2023, representing a total return of approximately 100% during the period. Our 2023 valuation assumes that HDD is worth $17.8 billion (1.9x CY23E revenue), that Flash is worth $18.1 billion (1.6x CY23E revenue) and that Western Digital generates more than $2 billion of free cash flow through the end of 2023 (after separation costs and the IRS settlement).", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "fabd7fce-79ee-436a-b4e9-0dd79b765dcd", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.02, "w": 0.35, "x": 0.11, "y": 0.38 }, "kind": "title", "text": "Proposed Direct Investment in Flash", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "0b99ae33-9814-4d7e-89cd-460f1cadbe35", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.02, "w": 0.25, "x": 0.11, "y": 0.69 }, "kind": "title", "text": "Unique Value Opportunity", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "9bd73e19-8e0b-4000-b62b-d87151a991c4", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [ { "name": "Big Idea Formula", "slug": "big-idea-formula", "agent": "Storyteller", "layer": "slide", "matchId": "270876c1-61eb-4b87-b7f2-71b34aa808f3", "evidence": "We believe the value opportunity at Western Digital is uniquely compelling. 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