Under the deal, which had been rumored for the past year, the new company will focus on flash memory for consumer and industrial devices, ranging from cell phones and MP3 players to digital cameras and computers. The deal is expected to close in the later half of the year.
Intel plans to sell its NOR assets and resources to the new company, while STMicroelectronics of Europe will sell its flash memory assets, including its NAND joint venture interest and other NOR resources, to the new entity.
"This (deal) is a good thing for the flash industry, a good thing for Intel and a good thing for STMicroelectronics," said Uche Orji, an analyst with UBS. "The NOR industry needs to consolidate."
Flash memory is used to store data without the need for a constant supply of electricity for DRAM or the moving parts of a hard drive. And although NOR memory has traditionally been in heavy use for mobile phones because of its reliability and short read-times,, according to data from iSuppli.
NOR, as a result, is increasingly viewed as a slow-growth business. Currently, four large players serve the market:, Intel, STMicroelectronics and Samsung. The Intel-STMicroelectronics announcement will bring that number down to three.
In exchange for selling its assets, Intel will receive a 45.1 percent stake in the new company and STMicroelectronics will get a 48.6 percent stake. Francisco Partners, meanwhile, is investing $150 million in cash for convertible preferred stock for its 6.3 percent stake in the company.
The new company is expected to receive a $1.3 billion term loan, a $250 million revolving credit line and the $150 million from Francisco Partners, totaling $1.7 billion.
The agreement calls for Intel to receive a cash payment of $432 million at the close of the deal, and STMicroelectronics to get $468 million. That comes out to a total of $900 million to pay the two chipmakers, leaving the new company with $800 million in working capital.
The new company will combine existing research and development, manufacturing, sales and marketing assets from both companies to form an entity with nine main research and manufacturing locations around the world and about 8,000 employees.
Last year, the two chipmakers noted, the key assets from their NOR and NAND businesses generated a combined annual revenue of about $3.6 billion. (Executives from the companies said the new company is expected to be profitable from its first day of operation.)
"From the outset, the company will be a leading supplier of flash memory solutions for wireless communications," Brian Harrison, general manager of Intel's Flash Memory Group and the CEO of the new company, said in a statement.
The daily operations of the new company will be handled by an executive management team appointed by Intel, STMicroelectronics and Francisco Partners.
Intel is no stranger to teaming up with others to produce chips. In late 2005,. Under that agreement, Intel took a 49 percent stake in the new company, IM Flash Technologies, and Micron took a 51 percent slice.
Intel and Micron initially each contributed $1.2 billion to build new plants in three states, with an additional $1.4 billion to be added over the next three years.
Intel and STMicroelectronics have worked closely in the past. Two years ago, the companies announced plans toto a common specification for phones and other products.
Because of that relationship, a number of industry observers and analysts had viewed a merger of the companies' NOR businesses as an inevitable step.
"This deal makes a lot of sense. Intel and STMicro have worked together to ensure their products work together and have streamlined their processes," Orji said. "But I don't think a lot of others will follow. Everyone else has a different production process, so other mergers aren't likely."
The transaction, however, is complicated by STMicroelectronics adding its NAND joint-venture with Hynix into the deal, Orji said.
He speculated that STMicroelectronics threw in its NAND business because it wants to exit the flash business and focus on other parts of its operations, such as logic and signal switches.
"At some point, STMicro or Hynix may buy each other," he added.