GT Advanced, the former Apple sapphire supplier that filed for bankruptcy back in October, never had a chance.
In a supplemental declaration by GT Advanced COO Daniel Squiller unsealed on Friday outlining GT Advanced’s relationship with Apple, it’s clear — at least as Squiller tells it — that Apple and GT’s relationship was doomed from the start.
We first saw the document after it was posted by the folks at StreetInsider.
This document follows a declaration from Squiller unsealed late last month that outlined some of the problems in Apple and GT’s relationship.
Friday’s document offers a bit more colour.
For one, Apple was supposed to be customer of GT Advanced, but the agreement between the companies didn’t require that Apple be GT Advanced’s customer. Apple simply became a lender.
And the agreement struck between the companies in the fall of 2013 was done via what Squiller called a “classic bait-and-switch strategy.”
This agreement also stated that GT could not do business with any of Apple’s competitors, which would be a reasonable requirement, because presumably Apple wouldn’t want to be funding the manufacture of materials that found their way into a competitors’ device. But again, Apple wasn’t required to buy any sapphire at all.
Additionally, GT was required to build sapphire to Apple’s specifications, which Squiller said, “continually changed and remain in flux to this day.” (Squiller’s complaint was given October 8; GT has subsequently said it will be exiting the sapphire business.)
The complaint also said that as of October 8, GT had incurred costs of $US900 million related to the deal. Ahead of its bankruptcy filing, GT’s market cap was about $US1.5 billion.
Here’s the ugly year-to-date chart of GT shares.
And the whole arrangement, at least as it’s outlined in the declaration, seems foisted upon GT Advanced, and certainly not by the company’s choosing.
As Squiller says:
“[T]he extensive and all-consuming nature of negotiations with Apple would have allowed little time to pursue alternatives. Knowing tht GTAT had no practical choice at that stage other than to concede to Apple’s terms, Apple forced a set of agreements on GTAT that, in combination with Apple’s economic leverage, put Apple in de facto control of GTAT.”
Squiller also says Apple advised GT management that they shouldn’t “waste their time” trying to negotiate with the company, and when GT management “expressed obvious concerns to Apple regarding the deal terms during the contract negotiations, Apple responded that similar terms are required for other Apple suppliers and that GTAT should: ‘Put on your big boy pants and accept the agreement.'”
Some of the terms outlined in the document that GT wasn’t too excited about include a $US50 million penalty per occurrence that any aspect of GT’s agreement with Apple were disclosed, and a $US1 billion penalty if GT doesn’t honour Apple’s 30 day exclusivity window should GT seek to sell its assets, or its sapphire business, or receives interest from a third party.
Apple also required GT establish a new wholly-owned subsidiary to implement what Squiller called, “a convoluted and artificial structure that serves no economic purpose — other than protecting Apple — such that GTAT Corp. would be obligated to buy and assemble furnaces for Apple, but the cash and furnaces would then be ’round-tripped’ through GT Equipment, a so-called ‘bankruptcy remote entity’ using an illusory sale and leaseback between GTAT Corp. and GT Equipment.”
And ahead of inking its agreement with Apple, GT also paid off the remainder of a credit facility with Bank of America, which the complaint says, “was necessary to permit Apple to take a lien on all of the assets of both GTAT Corp. and GT Equipment — yet another deal term that Apple demanded.”
So Apple basically owned GT Advanced.
The document does not paint the picture of a healthy relationship between two business partners, and sounds much more like Apple essentially buying a supplier, but structuring the deal in such a way so as to not assume any of the financial risk.
We’ve embedded the full document below. You should read it.
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