GT Advanced Technologies Bankruptcy Update
Oct. 19, 2014 2:32 PM ET | 15 comments | About: GT Advanced Technologies, Inc. (GTAT), GTATQ
Disclosure: The author is long GTATQ. (More...)
Summary
GTAT bankruptcy filings start in earnest an 10/21 as it appears likely that Apple confidentiality veil will be lifted.
GTAT is moving to shutdown the Mesa facility and it is unclear, what effect, if any, this will have on Apple product roll out.
Information coming out of the Chapter 11 indicates that GTAT management was consulting with bankruptcy attorneys as early as July first week. This seems inconsistent with prior management guidance.
It has now been over a week since GT Advanced Technologies (NASDAQ:GTAT) filed for Chapter 11 in New Hampshire. To the surprise and chagrin of the investment community and GTAT's vendors, most of the meaningful information in this case so far have been filed under seal and it is unclear yet as to why GTAT even filed for the bankruptcy.
Lawyers have been tied up in knots explaining what should or should not be confidential and what should or should not be filed under a seal. Apple's confidentiality contracts, where the confidentiality agreement itself is confidential, have created an unprecedented level of secrecy in what would otherwise be a mundane bankruptcy proceeding.
The good news for investors is that the secrecy may be coming to an end. Preliminary comments from Judge Henry Boroff indicate that the confidentiality veil may be lifted on Tuesday the 21st. The only party calling for secrecy at this point is Apple. All other parties, including GT Advanced Technologies, the US trustee, counsel representing the creditors, the state of New Hampshire, and the bankruptcy judge are calling for nearly full open disclosure. According to the US trustee, "Public scrutiny of a debtor's conduct and transparency in the bankruptcy process is essential to fostering confidence among creditors and parties in interest regarding the fundamental fairness of the bankruptcy system"
Judge Boroff is not buying the need for confidentiality of the agreements. According to Boroff, the deal appears to be similar to a complicated construction contract and he is not seeing the kind of intellectual property that deserves confidentiality. He has asked Apple attorneys to provide "extremely specific" items, by page and by line, which require confidentiality. If Apple cannot get very specific, the judge indicated that everything is likely to be unsealed.
Apple, a company notorious for secrecy, now has to determine what is at stake and what the confidentiality is worth. Barring a long shot deal between Apple and GTAT, we find it unlikely that the documents will stay sealed past next week.
Very early in the process, GTAT has moved to cease production at Mesa with immediate effect and has started serving termination notices to Mesa employees. Apple is in the middle of a major product rollout and it is unclear what effect, if any, this move would have on Apple products. In addition to the touch sensor and camera lens cover on iPhone, Apple uses sapphire for Apple Watch cover and sensors. Apple's unveiled a series of new iPads last week and there is a good chance that the touch sensor and the camera lens cover on these iPads also use sapphire. While there are no publicly available details on who provides sapphire for these devices, it is possible that Apple was counting on sapphire from the Mesa factory for these devices. If so, can Apple rapidly switch the supply from GTAT to a different vendor?
From a capacity perspective, we see the combined sapphire use for all of these products as minimal. Even if Apple has to look outside of Mesa for sapphire, we expect that, given sufficient time, Apple will be able to switch vendors without any significant issues. However, the short term impact of such a move on Apple is unclear.