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Opinion - Activist Spotlight


ACTIVIST JANA PARTNERS CALLS FOR A STRATEGIC REVIEW AT WOLFSPEED. HERE’S HOW IT
MAY DEVELOP

Published Sat, Apr 27 20249:27 AM EDTUpdated Sat, Apr 27 20249:46 AM EDT
Kenneth Squire@13DMonitor
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In this article

 * WOLF-0.31 (-1.11%)

Follow your favorite stocksCREATE FREE ACCOUNT
The New York Stock Exchange welcomes executives and guests from Wolfspeed (NYSE:
WOLF), on Oct. 4th, 2021, in celebration of its listing.
NYSE


COMPANY: WOLFSPEED (WOLF)

Business: Wolfspeed is a semiconductor company focused on silicon carbide
technologies. The company provides solutions for efficient energy consumption
and a sustainable future. Its product families include silicon carbide material
and power devices targeted for various applications such as electric vehicles
and fast charging, as well as renewable energy and storage.

Stock Market Value: $3.3B ($26.25 per share)


ACTIVIST: JANA PARTNERS

Percentage Ownership: n/a

Average Cost: n/a

Activist Commentary: Jana is a very experienced activist investor founded in
2001 by Barry Rosenstein. The firm made its name taking deeply researched
activist positions with well-conceived plans for long term value. Rosenstein
called his activist strategy “V cubed.” The three “Vs” were” (i) Value: buying
at the right price; (ii) Votes: knowing whether you have the votes before
commencing a proxy fight; and (iii) Variety of ways to win: having more than one
strategy to enhance value and exit an investment. Since 2008, the firm has
gradually shifted from that strategy to one which we characterize as the three
“Ss” (i) Stock price – buying at the right price; (ii) Strategic activism – sale
of company or spinoff of a business; and (iii) Star advisors/nominees – aligning
with top industry executives to advise them and take board seats if necessary.


WHAT’S HAPPENING

On April 22, Jana sent a letter urging Wolfspeed to engage in a comprehensive
review of strategic alternatives, including a sale of the company.


BEHIND THE SCENES

Wolfspeed is the world’s leading producer of silicon carbide, or SiC, and a
manufacturer of silicon carbide applications. SiC is an extremely difficult and
expensive substrate to manufacture: It requires growing epitaxial layers, baking
at up to 4,532 degrees Fahrenheit, and then using ion implantation. This gives
Wolfspeed a competitive advantage as the market leader. As a first mover, the
company enjoys domination of the global market for SiC, having produced on the
order of 90% of the material to ever exist. Due to the increased demand for
their materials products and power devices in EVs, motor drives, power supplies,
solar and transportation applications, the company sold its LED business in 2021
and its radio frequency business in 2023 to, in part, fund an increase in
manufacturing capacity of SiC and vertically integrated manufacturing. The
company has announced and is in the process of ramping up two major
manufacturing facilities simultaneously in Siler City, N.C. and Marcy, N.Y. The
John Palmour Manufacturing Center for Silicon Carbide 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 like metal oxide
semiconductor field-effect transistors, or MOSFETs, which are widely used in
electronics and power applications.



Over the past one-, three-, five- and 10-year periods, Wolfspeed has had a
negative total shareholder return and has vastly underperformed its peers. The
company doesn’t have a demand problem. In fact, demand is quite robust, and the
company has a substantial moat in SiC. For example, in 2023, Renesas made a
customer deposit of $2 billion to Wolfspeed in order to secure a 10-year supply
agreement for SiC wafers. Further, from a current base of nearly $1 billion, the
company’s expansion plan supports a $20 billion market opportunity by 2030. Even
in the event of an EV slowdown, Wolfspeed is such a small part of the market,
that it could easily reach capacity on its facilities.

What Wolfspeed really has is a supply and ambition problem. The rollout of its
two new facilities have been plagued by delays, and the company still only
projects 20% utilization for the Mohawk Valley plant by the end of fiscal 2024.
Even more concerning for investors has been the fact that the company announced
in early 2023 plans to construct the world’s largest and most advanced SiC
device manufacturing facility in Germany. Expansion is a great idea for a
company that is executing well and reaching capacity. Wolfspeed is doing neither
right now, and announcing further expansion plans before proving that it can
execute scares the market as evidenced by the stock’s performance. Jana would
like to see Wolfspeed do the following: (i) prioritize execution at Mohawk
Valley and Siler City, (ii) earn an acceptable return on capital, (iii) set
realistic targets and (iv) outline a clear plan for capital expenditures to
assure that the company will not need to pursue any additional dilutive capital
raises. If the company can create a credible forward-looking plan to earning an
acceptable return on capital and set realistic targets, then the market will
begin to regain confidence and the stock should rebound from its current
depressed levels.

Jana also recommends that the board commences a review of strategic
alternatives, including a possible sale of the company. However, with a stock
price teetering at about $25 per share – it was trading as high as $70 per share
in July 2023 – a sale of the company at an acceptable premium is highly unlikely
here. The more likely outcome is for management to fix the problems with the
company and potentially pursue a future sale or look for an investment from a
strategic investor that might be willing to invest at a high multiple to shore
up supply. Jana notes that Denso and Mitsubishi Electric recently made a
minority investment in Coherent at a multiple of 10 times revenue. Wolfspeed
presently trades at less than six times revenue.

This is similar to the issues Jana identified at Freshpet when the firm invested
there: supply shortages and difficulty rolling out its U.S. manufacturing
operations. At Freshpet, Jana also made operational and capital allocation
recommendations in addition to reviewing a sale of the company. Jana ultimately
received board representation and a sale never happened as the operational fixes
worked. Freshpet’s stock closed at $106.36 on Friday, up from $45.37 in
September 2022. As is customary for Jana, at Freshpet, the investor launched its
activist campaign with a team of experienced industry executives ready to be
board nominees, if necessary. Here, there has been no such mention of a “Jana
Dream Team,” but it is a little too early for that. The director nomination
window does not open until June 25 and closes on July 25, at which time we will
have more clarity on which road 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, a mutual fund that invests in a portfolio of activist
13D investments.


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