Cree Collaborates With Lextar To Continue Its Growth Momentum In LED Lighting

August 29th, 2014 by Trefis Team
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Leading LED manufacturer Cree (NASDAQ:CREE) made an investment of $83 million and entered into a supply agreement with Lextar Electronics Corporation for sapphire-based LED chips, last week. The companies also signed a royalty bearing license agreement for certain Cree LED chip and component intellectual property. Based in Taiwan, Lextar is a vertically-integrated LED company and has a strong technology position and customer base in the mid-power backlighting LED segment. Cree, on the other hand, offers outstanding performance in the high-power LED component and lighting market. Cree believes that becoming Lextar’s strategic customer in the lighting market will enable its continued growth in LEDs and lighting.

Cree will purchase 83 million Lextar shares at a price of NT$30 per share. The agreement has been approved by the boards of directors of both companies and is targeted to close in Cree’s second quarter of fiscal year 2015, subject to other approvals and customary closing conditions.  Upon closing, Cree will become the second largest institutional investor in Lextar, owning approximately 13% of the company.

The strong top line growth momentum combined with a strong balance sheet has given Cree the flexibility to respond to new opportunities in the market. The company currently has a cash balance of $1.2 billion and no debt.

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The general LED lighting market is expected to be the primary growth driver for the LED industry, as demand from the backlight market nears saturation. Cree has a fully integrated vertical business model and is the market leader in both LEDs and LED lighting products. This places the company in a strong position to leverage the global shift to LED lighting. LED lighting accounts for 15-20% of the global lighting market at present and the LED market share is expected to rise at a rapid pace over the next decade. [1]

Cree expects strong growth in LED fixtures and LED bulbs to drive growth in its lighting segment. To serve growth in these segments, Cree’s internal LED chip team is focused on high performance, high power LED chips that differentiate its LEDs in the market. Its LED manufacturing partners are focused on building some of the higher volume products, which gives the company the flexibility to utilize its internal factory to support new product ramps and shorten the time to market for new technologies. Lextar will provide Cree mid-power backlighting LEDs, which will enable Cree to focus its resources on high performance, high-power LED chips. The company believes that this arrangement gives it the operational and financial flexibility to achieve the best return on its people and invested capital.

We expect Cree’s LED market share to increase over our review period.

Our price estimate of $57.77 for Cree is at a significant premium to the current market price. See Our Complete Analysis for Cree Here

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Notes:
  1. Can LEDs Brighten Investor Portfolios?, Investopedia, August 29, 2013 [↩]