The New York Stock Exchange will welcome Wolfspeed (NYSE: WOLF) executives and guests to celebrate its listing on October 4, 2021.
NYSE
Company: Wolfspeed (WOLF)
Business: Wolfspeed is a semiconductor company focused on silicon carbide technologies. The company offers solutions for efficient energy consumption and a sustainable future. Its product families include silicon carbide materials and power devices for various applications such as electric vehicles and fast charging, as well as renewable energy and storage.
Market value: $3.3 billion ($26.25 per share)
Activist: Jana Partners
Percentage ownership: n/a
Average cost: n/a
Comment from activists: Jana is a highly experienced activist investor founded in 2001 by Barry Rosenstein. The company made a name for itself with thoroughly researched activist positions and well-thought-out plans for long-term value creation. Rosenstein called his activist strategy “V-rolled.” The three “Vs” were “(i) Value: Buy at the right price; (ii) Votes: Know whether you have the votes before starting a proxy fight; and (iii) diversity of profit opportunities: having more than one strategy to increase value and exit an investment. Since 2008, the Company has gradually transitioned from this strategy to what we characterize as the three “S”: (i) Stock Pricing – Buying at the right price; (ii) Strategic Activism – Selling a business or spin-off of a business; and (iii) Star Advisors/Nominees – working with top industry executives to advise them and take board seats when necessary.
What happens
On April 22, Jana sent a letter asking Wolfspeed to conduct a comprehensive review of strategic alternatives, including a sale of the company.
Behind the scenes
Wolfspeed is the world's leading silicon carbide (SiC) manufacturer and silicon carbide applications manufacturer. SiC is an extremely difficult and expensive substrate to produce: It requires growing epitaxial layers, baking at up to 4,532 degrees Fahrenheit, and then ion implantation. This gives Wolfspeed a competitive advantage as a market leader. As a first mover, the company dominates the global market for SiC and has produced around 90% of the material that has ever existed. Due to increased demand for its materials products and power devices in electric vehicles, motor drives, power supplies, solar and transportation applications, the Company sold its LED business in 2021 and its radio frequency business in 2023 to partially finance increased manufacturing capacity of SiC and vertically integrated manufacturing. The company has announced plans to simultaneously ramp up two large production facilities in Siler City, North Carolina, and Marcy, New York. The John Palmour Silicon Carbide Manufacturing Center in North Carolina is a facility dedicated to the production of SiC wafers. The company's Mohawk Valley project in New York will produce advanced SiC devices such as metal-oxide-semiconductor field-effect transistors, or MOSFETs, that are widely used in electronics and power applications.
Over the most recent one-, three-, five- and 10-year periods, Wolfspeed posted a negative total return to shareholders and significantly underperformed its peers. The company does not have a demand problem. In fact, demand is quite robust and the company has a significant lead in SiC. For example, in 2023, Renesas made a $2 billion customer deposit to Wolfspeed to secure a 10-year SiC wafer supply contract. Additionally, the company's expansion plan envisions a $20 billion market opportunity by 2030, from a current base of nearly $1 billion. Even in the event of a slowdown in electric vehicles, Wolfspeed is such a small part of the market that it could easily reach capacity at its facilities.
What Wolfspeed really has is a supply and ambition problem. There have been delays in the rollout of its two new plants, and the company still only expects the Mohawk Valley plant to operate at 20% capacity by the end of fiscal 2024. Even more worrisome for investors was the fact that the company was starting this announced in 2023 plans to build the world's largest and most modern SiC device manufacturing facility in Germany. Expansion is a great idea for a company that is performing well and reaching its capacity. Wolfspeed is doing neither at the moment, and announcing further expansion plans before it proves the company can execute it is scaring the market, as evidenced by its share price performance. Jana wants Wolfspeed to: (i) prioritize execution in Mohawk Valley and Siler City, (ii) achieve an acceptable return on capital, (iii) set realistic goals, and (iv) design a clear plan for capital expenditures. that the company does not have to carry out any further dilutive capital increases. If the company can create a credible forward-looking plan to achieve an acceptable return on capital and set realistic targets, the market will begin to regain confidence and the stock should recover from its current low levels.
Jana also recommends that the board begin exploring strategic alternatives, including a possible sale of the company. However, a sale of the company at an acceptable premium with a share price of around $25 per share – in July 2023 it was as high as $70 per share – is highly unlikely. The more likely outcome is that management resolves the issues with the company and may seek a future sale or seek investment from a strategic investor who may be willing to invest at a high price to support the offering. Jana points out that Denso and Mitsubishi Electric recently made a minority investment in Coherent worth 10 times sales. Wolfspeed currently trades at less than six times sales.
This is similar to the issues Jana identified at Freshpet when the company invested there: supply shortages and difficulty launching its U.S. manufacturing operations. At Freshpet, in addition to reviewing a company sale, Jana also made recommendations on operating and capital allocation. Ultimately, Jana received representation on the board and a sale never came about because the operational corrections worked. Freshpet shares closed at $106.36 on Friday, up from $45.37 in September 2022. As is usual with Jana, the Freshpet investor launched its activist campaign with a team of experienced industry executives who were willing to be nominated as board candidates if necessary. There is no talk of a “Jana Dream Team” here yet, but it is still a bit too early for that. The nomination window for directors doesn't open until June 25th and closes on July 25th. At that point we will have more clarity about the path this campaign will take.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of 13D activist investments.