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Jabil strides in a new direction

By KRIS HUNDLEY
Published November 23, 2006

After building a multibillion-dollar business making internal electronics for a variety of consumer products, Jabil Circuit Inc. took a giant step Wednesday toward supplying the sleek and sexy casings for the latest must-have mobile devices as well.

The St. Petersburg manufacturer is offering nearly $1-billion in a bid to buy Taiwan Green Point Enterprises Co., which makes plastic casings for everything from Sony Ericsson cellphones to Apple's video iPod to popular BlackBerry devices.

Jabil's tender offer for the publicly traded company, based in Taichung, Taiwan, is $3.31 a share. If completed, it would be Jabil's largest acquisition ever, costing $875-million to $900-million.

The deal would enlarge Jabil's worldwide employee base by about 50 percent to nearly 100,000. In addition, Green Point, which had 2006 revenues of $517-million, will add nine factories - seven in China and one each in Taiwan and Malaysia - to Jabil's roster of nearly 50 facilities in 20 countries.

In the past, Jabil, which had total 2006 revenues of $10.3-billion, focused on making the electronic circuitry for a variety of devices and avoided moving down the supply chain.

But in a conference call with analysts Wednesday morning, Tim Main, Jabil's president and chief executive, said vertical integration with a casings-maker like Green Point is the right strategy in the booming consumer products market.

"We are thrilled to announce this deal with Green Point Enterprises," Main said. "When combined with Jabil's global infrastructure, systems and electronic expertise, we will possess a market leading end-to-end capability with outstanding long-term growth prospects."

Since entering the consumer electronics business in 2002, the segment has become a bigger contributor to Jabil's revenues - generating an estimated $4-billion in 2007 - than the communications, computing and storage sector that has been the company's heritage. Jabil also has a growing electronics manufacturing business in the medical, instrumentation and automotive category.

"IT managers might care what their product looks like, but it goes in the wiring closet somewhere," Main said, referring to Jabil's longstanding computer electronics business. "But with consumer products, things people pull out at dinner on a Friday night, they want it to look good. People want an attractive product, and they're willing to give one up to get one that's sexier and cooler. It's an entirely different value proposition."

The payoff from making the coolest cell phone casing rather than hidden widgets is considerable. Operating margins at Green Point, the world's third-largest maker of handsets, have averaged about 11 percent compared with Jabil's 4 percent.

Green Point's customer list also has little overlap with Jabil's. While Jabil counts Nokia and Philips among its accounts, Green Point's customers include Motorola, Apple, Sony Erisson, LG, Seimens, Samsung and RIM. In addition to cell phone casings, the company makes plastic parts for back light modules, optic lenses and batteries.

Jabil intends to keep the Green Point name and operate the business as an independent subsidiary, retaining its management. Since the primary goal is expanding market reach, rather than cutting costs, no layoffs or factory closings are planned, Main said.

The deal, in discussion for nearly a year, is expected to close in the spring. The tender offer will remain open for 50 days. Shareholders owning about 43 percent of Green Point's shares have already agreed to the acquisition.

Jabil, which said last week that it is revising its 2005 financial statement after an internal review into its options granting practices, said it has financing commitments in hand for the Green Point deal. The company said it could provide no further guidance on when its restated financials would be available.

Though Fitch Ratings placed Jabil on a negative ratings watch after the deal's announcement, two analysts praised the company's plans.

Amit Daryanani, an analyst with RBC Capital Markets in San Francisco, said Jabil will be moving into a highly competitive consumer arena where it has limited experience. "But given that their history has been fairly successful, that tells me they'll get the deal right," he said.

Another analyst, Brian White of Jefferies & Co. in New York, said Green Point's rich margins and new customers mean the transaction makes sense strategically and economically for Jabil.

Noting a number of risk factors, including the Securities and Exchange Commission's inquiry into backdating of stock options at Jabil, White issued a buy recommendation on the stock late Wednesday.

"Investors that can see through the near-term issues and focus on Jabil's normalized earnings power have a rare opportunity to purchase one of the fastest growing technology companies over the past decade at an attractive valuation, " White wrote.

Jabil's stock closed Wednesday at $29.15, up 10 cents.

Kris Hundley can be reached at hundley@sptimes.com or (727) 892-2996.

Taiwan Green Point Enterprises Co.

Headquarters: Taichung, Taiwan

Founded: 1979

Revenues 2006: $517-million

Operating margin: 11 percent

Employees: 30,000

Factories: Seven in China, one each in Taiwan and Malaysia

Customers: Motorola, Sony Ericsson, Compal , LG, Samsung, Seimens, Apple, Research in Motion

Products: casings for cell phones, Apple's video iPod, RIM's BlackBerry devices

[Last modified November 22, 2006, 22:34:37]