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For a generation, Intel’s best-known business partner was Microsoft. Now, however, it has formed a deep kinship with Wall Street.
Intel announced on Tuesday that Apollo Global Management would lead an $11bn investment to create a semiconductor fab in Ireland. Just two years ago, it struck a similar deal with Brookfield to build a pair of fabs in Arizona. The Silicon Valley icon calls it a “smart capital” strategy where it lines up sophisticated outside investors to fund manufacturing where Intel remains in charge.
The A-rated company could sell bonds or stock to fund the capital buildout. Instead, the 51/49 joint venture targets a cost of capital owed to the Apollo group that lies between Intel’s debt and equity charges. Intel has made the bet that it can keep up with TSMC in the most advanced microprocessors and that the US company can also be a “foundry” for other chip designers.
The wager under chief executive Pat Gelsinger so far has a mixed record. Shares of Intel in 2024 are down — its market capitalisation is just $130bn — as it has largely missed the mania in artificial intelligence enjoyed by Nvidia. The latter’s market cap is now 22 times that of Intel.
Still, Apollo and its co-investors have created a highly structured investment where its returns should achieve at least the high single digits with little risk of falling short. For Intel, it minimises its near-term cash obligations at a time when its profitability has been challenged.
Trillions of dollars of private capital have been raised from sovereign wealth funds and large pensions. That comes at an opportune time when long-term, large-scale infrastructure projects in manufacturing, data centres, fibre, decarbonisation and electrification are about to accelerate.
An $11bn commitment might pale in size with the market value of Nvidia. But only a handful of companies like Apollo and Brookfield are able to benefit from deals such as the Intel joint ventures where multibillion-dollar cheques are merely table stakes.
While the masters of the universe will probably do just fine thanks to the fine-print details they have negotiated, Intel shareholders should ask if growing chip manufacturing and production can be done efficiently enough to generate a positive return on their common equity.
Intel has shown the ability to be creative in financial engineering. But its shares today are down slightly from when the original Brookfield deal was announced in 2022. The chipmaker says these deals are cheaper than using common equity, even though Intel’s equity cost of capital seems to keep going up.