Rating agency UBS reported n Wednesday that Apple (NASDAQ: AAPL) is planning to cut its royalty payments to Imagination Technologies by as much two thirds over the coming months.
The British-based Imagination Technologies said earlier this month that Apple will no longer use its graphics chips in the iPhone, iPad and iPod products. The move resulted in a 71% single-day plunge in Imagination's stock.
Citing the UBS report, media outlets said Apple's decision to pay a decreased royalty rate — $0.10 compared to the current $0.30 U.S. rate — to Imagination would, in the words of the report, "become loss-making by fiscal 2019." That move could simply prolong the demise of Imagination Technologies, while also opening the latter firm up for an outside acquisition.
Apple is reportedly planning to build its own chips instead, though Imagination says any plans to do so could ultimately infringe on its patents. That's where Apple might see an opportunity to move in and buy.
Valuing London-listed Imagination using discounted cash flows, UBS analysts estimated its Apple business is worth 75 pence, while, without Apple, the stock is worth just 35 pence. That totals 110 pence (or about $1.41 U.S.), using a sum-of-the-parts valuation.
Imagination’s stock trades in London today at 103.19 pence ($1.32 U.S.) per share.
Apple, the world's most valuable company, commands a market capitalization of $741 billion U.S. that is around 2,000 times greater than Imagination's equivalent of 370 million U.S.
Apple shares closed Tuesday at $141.20 U.S., very near their 52-week peak of $145.46, versus a gulch of $89.47 U.S., plumbed in mid-May.