ON Semiconductor: We See Allegro Offer as a Fair Price for a Strategic Fit

Key Morningstar Metrics for ON Semiconductor

• Fair Value Estimate: $72.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

On March 5, ON Semiconductor ON announced an all-cash offer of $35.10 per share for Allegro MicroSystems ALGM, which implies an enterprise value of $6.9 billion. This valuation is a 57% premium to Allegro’s share price at the end of February, before rumors of a deal first circulated.

Why it matters: Allegro is a natural fit with Onsemi, in our view. Like Onsemi, it holds a portfolio of power chips and sensors and targets the automotive and industrial markets. We think the companies have complementary portfolios and could benefit from cross-selling.

• The takeover offer is unsolicited. Onsemi said it submitted an initial bid in September 2024; the March offer is roughly 2% higher.
• The deal fits our long-term expectations that Onsemi will remain focused on automotive and industrial power chips, with nice adjacent exposure to sensors.

The bottom line: We maintain our fair value estimate of $72 per share for Onsemi and see the stock as undervalued. We view the deal as value-neutral, with a fair purchase price and expected operating expense synergies. We assign a 50% probability that the deal will go through at the proposed price.

• Allegro has slightly higher gross margins than Onsemi, but it also has significantly higher operating expenses on a relative basis, which we would expect to be cut. After the deal’s close, we would expect Allegro to be accretive to earnings per share in the first year and accretive to gross
• We expect Onsemi would have to take on roughly $4.5 billion in debt to finance the deal, but we believe good free cash flow would help the firm quickly deleverage. We would expect a net debt/adjusted EBITDA ratio below 2 times for Onsemi within two years of the deal closing.