Imagination Tech Shares Plunge After Apple Rejects Chip Deal

(Bloomberg) -- Imagination Technologies Group Plc shares plunged as much as 69 percent after the U.K. chip designer said Apple Inc. will stop using its intellectual property in new products, setting the stage for a clash with its biggest customer.

The iPhone maker has informed Imagination Technologies that it will cease using its graphics technology for new products, including phones, tablets, and watches, in 15 months to 2 years, according to a statement Monday.

"This is what we would describe as a black swan moment for the company and investors in Imagination," said Neil Campling, head of technology research at Northern Trust Securities, in a research note. "We view Imagination as now uninvestable."

The move means Imagination Technologies risks losing future royalty payments from Apple, which considered acquiring the U.K. supplier as recently as last year. However, Imagination Technologies said it believes Apple will struggle to avoid infringing its intellectual property rights.

"Apple has not presented any evidence to substantiate its assertion that it will no longer require Imagination's technology, without violating Imagination's patents, intellectual property and confidential information," Imagination Technologies said in the statement.

A spokeswoman for Apple declined to comment.

Shares of Imagination Technologies fell as low as 76 pence for its biggest-ever intraday slump, and were down 63.5 percent to 97.75 pence as of 10:01 a.m. in London.

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The two companies are now in talks over future license and royalty agreements. Apple amounts to just over half of Imagination Technologies' annual revenue. The British company received 60.7 million pounds ($76.1 million) in license fees and royalties from Apple in the year ended April 30, 2016, and expected to get 65 million pounds in such payments in the fiscal year ending this month, according to the statement. The U.K. company's revenue for last fiscal year was 120 million pounds.

"If the group is unsuccessful in challenging Apple's position, we would expect the group to need to make significant operational changes to align the cost base to the new revenue profile," said Oliver Knott, an analyst at N+1 Singer Ltd.

In early 2014, Imagination Technologies said it had extended its multi-use license agreement with Apple for its range of current and future graphics and video chips.

In March last year, Apple said it had held “some discussions” to acquire Imagination Technologies but didn't have plans to make an offer at that time. Apple is Imagination Technologies' fourth-largest shareholder, with an 8.1 percent stake as of Feb. 28, according to data compiled by Bloomberg.

Apple Chips

Apple has been busy taking in-house development work for its graphic processing units. The Cupertino, California-based company is currently designing a new chip for future Mac laptops that would take on more of the functionality currently handled by Intel Corp. processors. Apple already designs its own smartphone processors, obviating the need to turn to Qualcomm or another supplier for chipsets.

In Monday's statement, Imagination Technologies said Apple "has asserted that it has been working on a separate, independent graphics design in order to control its products."

Any move by Apple to abruptly end its contract with Imagination Technologies could lead to a major dispute between the two companies. "Given our experience of patent litigation, which can often be quite tenuous, the case against Apple would be very strong in our view if it tried to go it alone without a commercial agreement," said Nick James, analyst at Numis Corp Plc.

Imagination's Future

Imagination Technologies, with about 1,700 employees,  spent last year restructuring its business, cutting jobs and divesting unwanted assets, and refocusing on graphics and multimedia, including the technology behind virtual reality headsets.

The U.K. company is also attempting to expand beyond the graphics processors it supplies for mobile devices. Like many companies, it's adapting its technology for the emerging autonomous-vehicle market. For self-driving cars to work safely, a car must quickly interpret the data coming in from cameras and sensors. Imagination's chips helps with those computations. 

However, Roger Phillips, analyst at Investec Securities said: "The material financial impact from a loss of its largest customer could raise the risk of other customers not signing future licenses with Imagination until the situation with Apple is resolved."

--With assistance from Adam Satariano

To contact the reporter on this story: Giles Turner in London at gturner35@bloomberg.net.

To contact the editors responsible for this story: Giles Turner at gturner35@bloomberg.net, Edwin Chan, Ville Heiskanen