Vitesse Semiconductor Corporation (Pink Sheets:VTSS) announced a definitive agreement to sell a portion of its storage products business to Maxim Integrated Products, Inc. (NASDAQ:MXIM) for $63 million in cash and potential earn-out payments of up to $12 million in the aggregate. Vitesse also announced $30 million in new financing, which the Company will use, along with the sale proceeds, to repay its existing credit facility and to invest in its business.
“As a result of these transactions, Vitesse is better focused on its core Networking and Ethernet markets where we have strong competitive advantages and can be a leader. Further, we are now positioned with the right capital base to build a sustainable business model and invest in our future growth,” said Christopher R. Gardner, chief executive officer of Vitesse.
Vitesse Will Focus on Networking and Ethernet IC Portfolios Following Sale
Maxim will acquire Vitesse’s Serial Attached SCSI (SAS), Serial Attached ATA (SATA) expander product segments, enclosure and baseboard management devices and certain other assets of Vitesse’s Storage Products Division. The products being divested accounted for approximately $20 million of Vitesse’s consumption during the 12 months ended June 30, 2007.
Under the terms of the agreement, Vitesse will receive a cash payment at closing in the amount of $63 million. Additionally, Vitesse may receive cash earn-out payments of up to $12 million upon achieving certain commercial milestones over the period of Vitesse’s fiscal year 2008. The transaction is expected to close in the fourth calendar quarter of 2007 following the satisfaction of regulatory requirements and other customary closing conditions.
Vitesse will retain its RAID-on-Chip (ROC) and Fibre Channel product segments, which had been part of the Storage Products Division and will be integrated into its continuing operations. Many of these products complement the Company’s Networking and Ethernet portfolios that serve the Enterprise market. Both the ROC and Fibre Channel product segments have an established customer base with active designs that are consistent contributors to the Company’s total business.
As a result of the divestiture, Vitesse will discontinue its Storage Products Division and anticipates a reduction in operating expenses of approximately $2.5 million per quarter in the first full quarter following the close date. Vitesse will continue to deliver on its commitments to all customers for all retained products that were previously part of the Storage Products Division.
“This sale allows us to focus all our attention on the many growth opportunities we see in our core Networking and Ethernet IC businesses. Our goal is to deliver improved results and shareholder returns as we strategically focus our financial, technical, marketing and sales resources on our best opportunities,” said Mr. Gardner. “We would like to thank all of our storage employees for their many contributions to Vitesse.”
Credit Suisse Securities (USA) LLC acted as financial advisor and Perkins Coie LLP acted as legal counsel to Vitesse in connection with the transaction.
Financing and Debt Repayment
Whitebox VSC, Ltd. agreed to lend Vitesse $30 million and may lend up to an additional $15 million. The loan will be for four years and will be secured by substantially all of Vitesse’s assets. The closing of the loan is subject to a number of conditions, including the concurrent closing of the divestiture of the storage products business to Maxim.
In connection with this loan agreement, Vitesse and Whitebox also entered into a Senior Unsecured Convertible Note Purchase Agreement that gives Whitebox the right – until the third anniversary of the initial funding – to purchase convertible notes in an aggregate principal amount of up to $45 million, which Vitesse would use to repay amounts outstanding under the loan. These convertible notes, if issued, would be convertible into the Common Stock of Vitesse at an initial conversion rate of $2.00 per share of Common Stock, subject to certain adjustments.
Vitesse intends to use approximately $15 million of the proceeds of the debt financing, as well as the proceeds from the sale of the Storage Products assets, to repay the Company’s current facility with affiliates of Tennenbaum Capital Partners. Tennenbaum has agreed that, in the unlikely event it is not paid in full, it will release its liens on the Storage Products assets being sold and the parties have agreed to revise certain provisions of the current credit facility.
Rich Yonker, chief financial officer of Vitesse, said, “In combination with our positive cash flow from operations, this transaction will allow Vitesse to selectively invest in areas where we believe we can generate solid returns.”
Credit Suisse Securities (USA) LLC acted as financial advisor and O’Melveny & Myers LLP acted as legal counsel to Vitesse in connection with the transaction.
Vitesse designs, develops and markets a diverse portfolio of high-performance, cost-competitive semiconductor solutions for communications and storage networks worldwide. Engineering excellence and dedicated customer service distinguish Vitesse as an industry leader in Gigabit Ethernet LAN, Ethernet-over-SONET, Fibre Channel, Optical Transport, and other applications. Vitesse innovation empowers customers to deliver superior products for Enterprise, Access, Metro, and Core applications.
Vitesse is a registered trademark in the United States and/or other jurisdictions of Vitesse Semiconductor Corporation.