Investing.com -- Broadcom (NASDAQ:AVGO) could be looking at an “extremely lucrative” opportunity if it moves forward with an acquisition of Intel’s x86 products business, according to Piper Sandler analysts.
They believe such a deal could generate significant operating income and enhance Broadcom’s earnings profile.
“Assuming that AVGO management pays a premium to the current market cap and is able to turn this business around just as it has almost every other business that it has previously acquired, we think the numbers become extremely compelling,” analysts led by Harsh V. Kumar noted.
The investment bank’s analysis suggests that the combined client and server segments of Intel (NASDAQ:INTC) could yield roughly $15 billion in annual operating income.
Piper Sandler believes Broadcom would likely be interested only in Intel’s x86 business, which includes client computing (CCG) and data center and AI (DCAI), and may sell off other segments that do not align with its strategy.
Intel holds around 70% of the client CPU market for notebooks and desktops and has a similar share in server CPUs, with 50% among cloud customers and 75% in enterprise. However, it is important to note that the company is losing server market share to rival AMD (NASDAQ:AMD).
Piper Sandler estimates a potential sale price of approximately $101 billion for the x86 business.
“We ultimately arrived at a potential sale price of roughly $101 billion and a Debt/EBITDA ratio of ~3.47x for the combined company, which is very palatable in the world of semis, in our view,” the analysts stated.
The firm also projects that such a deal could add roughly $1.50 to $1.60 in earnings per share (EPS) to Broadcom.
Longer-term, Piper Sandler sees growth of 5%-10% in Broadcom’s both client and server businesses. “We believe this is a sweet spot of a market for CEO Hock Tan’s strategy given prior semiconductor acquisitions,” it said.
Looking at the financial implications, the firm highlights that Broadcom could borrow the entire amount and still maintain a reasonable leverage level.
“We see only a 3.5x Debt/EBITDA post debt financing for the x86 business,” the report noted, assuming a 6% interest rate, but that figure could be even lower “given the potential involvement of the US government.”
Piper Sandler reiterated its Overweight rating on Broadcom, with a price target of $250. The firm emphasized that Broadcom’s history of acquiring market-leading businesses positions it well to extract value from a potential Intel acquisition.