AMD pays big fee to GlobalFoundries to have some chips made at another fab, hints at 10nm skip

AMD rolled out a press release to inform the world that it has made some amendments to the Wafer Supply Agreement (WSA) it has with GlobalFoundries. As usual, these statements are a bit cryptic but the gist seems to be that AMD is paying a big sum to receive more wafer sourcing flexibility.

Under the terms of the deal, which covers calendar year 2016 through 2020, AMD will gain the flexibility to have certain products made with another wafer foundry. Even though the press release talks about the "success of the 14nm node", the action seems to imply AMD isn't entirely happy about GlobalFoundries' 14nm process and wants to keep its options open. It seems like a nice way of saying that the GlobalFoundries 14nm node sucks.

The two companies also agreed to set up a technology collaboration for the 7nm node, thereby implying the rumors about skipping the 10nm node are true. Under the terms of the deal, AMD will pay $100 million in cash to GlobalFoundries, to be paid in installments beginning in Q4 2016 through Q3 2017. Secondly, AMD will be required to pay quarterly fines to GlobalFoundries based on the volume of the wafers it purchases from another wafer foundry.

Furthermore, AMD also grants a wholly-owned subsidiary of the Mubadala Development Company a warrant to purchase 75 million shares of AMD's common stock at a purchase price of $5.98. This warrant may be exercised in whole or in part prior to February 29, 2020, and is only exerciable if Mubadala and its subsidiaries do not own over 19.99 percent of AMD's stock after the exercise. Not only are the warrants granted at a discount of almost 20 percent versus the current stock price, they also represent significant dilution versus AMD's current share count of around 795 million shares.

The press release below also talks about revised annual wafer purchase targets and a new framework for yearly wafer pricing, but no specifics were disclosed. This is the sixth amendment to the WSA.

AMD (NASDAQ: AMD) announced that it has entered into a long-term amendment to its Wafer Supply Agreement (WSA) with GLOBALFOUNDRIES Inc. (GF) for the period from Jan. 1, 2016 to Dec. 31, 2020.

"The five-year amendment further strengthens our strategic manufacturing relationship with GLOBALFOUNDRIES while providing AMD with increased flexibility to build our high-performance product roadmap with additional foundries in the 14nm and 7nm technology nodes," said Dr. Lisa Su, AMD president and CEO. "Our goal is for AMD to have continued access to leading-edge foundry process technologies enabling us to build multiple generations of great products for years to come."

GLOBALFOUNDRIES' Fab 8 in Malta, N.Y. is playing a significant role in providing leading-edge capacity for AMD's graphics and processor products, including the recently launched AMD Radeon™ Polaris GPUs and upcoming "Zen"-based processors.

In addition to modifying certain terms of the WSA applicable to AMD's microprocessor, graphics processor, and semi-custom products, the amendment:

Covers a 5-year period, spanning from calendar year 2016 through 2020;

Establishes a comprehensive framework for technology collaboration between AMD and GF for the 7nm technology node, building on the success of the 14nm node;

Provides AMD with the flexibility to manufacture certain products with another wafer foundry;

Sets annual wafer purchase targets from 2016 through the end of 2020, fixed wafer prices for 2016, and a framework for yearly wafer pricing.

In partial consideration for these rights, AMD will:

Make a $100 million cash payment to GF, paid in installments beginning in Q4 2016 through Q3 2017.

Make quarterly payments to GF beginning in 2017 based on the volume of certain wafers purchased from another wafer foundry.

Grant to West Coast Hitech L.P., a wholly-owned subsidiary of the Mubadala Development Company PJSC, a warrant to purchase 75 million shares of AMD common stock at a purchase price of $5.98 per share. The warrant may be exercised in whole or in part prior to February 29, 2020. The warrant is only exercisable to the extent that Mubadala or its subsidiaries do not beneficially own, either directly or indirectly, an aggregate of more than 19.99 percent of AMD's outstanding capital stock after the exercise.

AMD expects to record a one-time accounting charge in the third quarter of 2016 of approximately $335 million comprised of the $100 million payment and the $235 million value of the warrant.