Broadcom confirms plans to redomicile in the U.S.

Broadcom Limited (AVGO) announced that it intends to initiate a redomiciliation process to change the parent company of the Broadcom corporate group from a Singapore company to a U.S. corporation.

The redomiciliation will occur whether or not there is corporate tax reform in the United States, although the final form and timing of the redomiciliation will be affected by any corporate tax reform.

The redomiciliation will be voted on by the company’s shareholders and is expected to be effected in a manner intended to be tax-free to Broadcom’s equity holders.

“We believe the USA presents the best place for Broadcom to create shareholder value,” said Hock Tan, the company’s President and CEO.

“We expect the tax reform plan effectively to level the playing field for large multinational corporations headquartered in the United States and to allow us to go all in on U.S. redomiciliation. However, we intend to redomicile to the United States even if there is no corporate tax reform.”

“The returns we can drive by continuing to pursue our growth strategy far outweigh the incremental taxes we would expect to pay by redomiciling in the USA,” said Tom Krause, the company’s CFO.

“We support the tax reform plan because it is pro-growth and would allow companies like us to bring off-shore earnings back to the United States after paying an annual U.S. minimum tax on global profits.”

EARNINGS GUIDANCE

Earlier today, the company said for Q4 2017, Broadcom expects revenue will be at the higher end of the business outlook provided during its earnings announcement on August 24.

The company said in August it expected GAAP revenue in Q4 ended Oct. 29 at $4.78 billion plus or minus $75 million and non-GAAP revenue at $4.8 billion plus or minus $75 million.

ANALYST COMMENTS

BofA Merrill Lynch estimates moving its domicile to the U.S. could raise Broadcom’s (AVGO) tax rates from 4%-5% to about 12%, but the firm thinks this could be offset by potential Brocade (BRCD) synergies. The firm keeps a Buy rating on Broadcom, arguing that the reasons to own the stock – namely its premium assets, best-in-class management, and dividend potential – remain intact. The firm adds that being in the U.S. could be a precondition to acquiring Brocade and may enable Broadcom to pursue future M&A.

JPMorgan analyst Harlan Sur says Broadcom’s (AVGO) U.S. domiciliation process will occur with or without tax reform, which should pave the way for the Brocade (BRCD) deal to close in two weeks. Assuming a worst case of no tax reform, the analyst estimates the company’s earnings power including the contribution from Brocade will be $18.00-$18.50 in 2018. Assigning a Semiconductor group price-to-earnings multiple would drive fair value for Broadcom to around $310 to $315 per share, Sur tells investors in a research note. Further, citing strong near-term demand trends, the analyst remains confident management raising the annual dividend by at least 50% to $6.00 in early December. He keeps an Overweight rating on Broadcom shares with a $315 price target.

AVGO last traded at $252.16, down $7.12.

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