Avnet And Benchmark Shareholders Could Get A Settlement Gift (NASDAQ:AVT)

Background

During the period between January 1, 2002 and December 31, 2013, some Japanese, Korean, and Taiwanese capacitor manufacturers engaged in a price-fixing scheme that harmed several US manufacturers, including Avnet (NASDAQ:AVT) and Benchmark Electronics (NYSE:BHE).

Capacitors are basically a small and relatively cheap component which has the ability or “capacity” to store energy.

There is a large variety of capacitor styles and types, each one having its own particular characteristic – however, they are all widely used in electronic devises.

It is no surprise that, over a decade, a price fixing scheme resulted in damages of several hundred million dollars to OEMs.

From January 2016 to May 2018 some manufacturers pleaded guilty to participating in this conspiracy to fix prices of certain electrolytic capacitors, including NEC TOKIN Corporation, Hitachi Chemical Co., Ltd., ELNA Co., Ltd., Holy Stone Holdings Co., Ltd., Rubycon Corporation, Matsuo Electric Co., Ltd., Nichicon Corporation and Nippon Chemi-Con Corporation.

The US court in charge of the class action has already approved settlements of Plaintiffs’ claims against a long list of companies:

AVX Corp.; ELNA Co; Fujitsu Ltd.; Hitachi Chemical Co., Ltd.; Hitachi AIC.; Holy Stone Enterprise Co., Ltd., Milestone Global Technology, Inc. (D/B/A HolyStone International), Vishay Polytech Co., Ltd.; KEMET Corporation; NEC Tokin Corporation; Nichicon Corporation; Nitsuko Electronics Corporation; Okaya Electric Industries Co., Ltd.; Panasonic Corporation; SANYO Electric Co.; ROHM Co., Ltd.; Rubycon Corporation; Shinyei Kaisha; Shizuki Electric Co., Inc.; Soshin Electric Co., Ltd.; and Taitsu Corporation.

To cut a long story short, the Capacitors Antitrust Lawsuit has allowed a class of direct and indirect purchasers, like consumers, to be awarded total damages of roughly $700 million so far, through several rounds of settlements.

Here is an interesting summary of the case, in the exact words of Judge James Donato of the United States District Court for the Northern District of California:

The Joseph Saveri Law Firm has been the lead counsel throughout the Capacitors Antitrust Litigation.

Why this lawsuit matters to AVT and BHE.

As we previously noticed, most capacitor manufacturers pleaded guilty to participating in this price-fixing theme, and several manufacturers have already settled most of the Antitrust litigation claims through payments that, according to a Bloomberg article, “represent [on average] 141% of overcharges paid by the direct purchasers”.

Both Avnet and Benchmark Electronics elected to opt out of the antitrust litigation, to pursue their own lawsuit:

We have little to no doubt that the same defendants involved in the Capacitors Antitrust Litigation will try to avoid going to a court judgement, and be willing to settle with Avnet and Benchmark Electronics, given all the evidence produced in court.

Judge James Donato has clearly spoken in a favor of a settlement between the parties – the sooner, the better.

One lawyer, Mr. Turken, recently spoke for AVT and BHE in court. He is also representing Jaco Electronics, a smaller company, compared to Avnet and Benchmark, that was sold to WPG Americas in 2008.

Jaco is a much smaller company compared to Avnet and Benchmark: in 2002, the first year of the price-fixing scheme, these three companies had revenues of $200 million, $1,6 billion and $9 billion, respectively.

While it is not possible (or we were not capable) to get exact data of the magnitude of the claim for each individual company, a rule of thumb would probably indicate that the lion’s share is to be found on Benchmark’s and Avnet’s side.

As a side note, Benchmark Electronics settled some of its claims, in 2019, with a few, smaller manufacturers.

Here is their commentary taken from their June, 2019 10 Q filing:

We are plaintiffs in a multi-district class action filed in the US District Court for the District of Arizona on June 28, 2017, Case No. 2:17-cv-02058-DJH. The case was brought against eighteen worldwide manufacturers of aluminum, tantalum, and film capacitors. The plaintiffs, including the Company and several of its subsidiaries, allege that the manufacturers participated in a conspiracy to fix the prices of and allocate markets for the affected capacitors between 2001 and 2014. While the litigation is still ongoing, six of the eighteen defendant groups have settled out of court resulting in a net recovery of $2,938,500 by Benchmark during the first six months of 2019.

link, pg. 35 – emphasis added.

We believe these settlement represented just a small share of the total claim brought to court by Benchmark.

During a recent court conference, Mr. Turken openly spoke about the size of the remaining claim from his clients:

The (very good) news for AVT and BHE shareholders is that Avnet, Benchmark and Jaco have a claim for $110 million, which could result, including treble damages, in a $330 million court win.

We are inclined to believe that the upper range of $330 million will not be met, as the parties will probably prefer to reach an out-of-court settlement.

The Antitrust class action ended with an average 140% recovery on overcharges.

If we extrapolate this datum, to be used as a forecast of a potential settlement, we might round up the amount that might be awarded to Jaco, AVT and BHE to roughly $150 million.

It is to be expected that legal fees and court costs will dramatically reduce the net amount received by AVT and BHE.

Again, if history can be used in this guess game, legal fees and court costs represented roughly 40% of the settlements agreed in the Antitrust lawsuit.

We would probably expect a percentage in the range of 30% to 40% of recovery being spent in legal costs.

Assuming our speculations have some ground, an hypothetical net recovery of $90 million to $100 million could be awarded to AVT, BHE and Jaco.

Time to bring out your crystals ball and start the guess game as to the major potential beneficiary of this outcome.

We have no doubts AVT and BHE should end up with the lion’s share of the collected amount.

The size of these two companies in the 2002 to 2013 time frame widely exceeded Jaco, and their purchases of capacitors should be in the ten million dollars for each company.

As to the expected timing for the litigation to end, Judge James Donato has scheduled a status conference for next August 18th, and sent a smaller than $1 million claim by AASI [the Beneficiaries’ Trust representing the interests for All American Semiconductor Inc.] for mediation around October 2022.

We wouldn’t be surprised if the AVT and BHE case came to a conclusion before year’s end, assuming no negative impact from COVID or additional litigation efforts from the defendants, mainly to procrastinate the case.

Conclusion

We recently contacted both company’s invest relations, asking for a comment about the potential positive outcome of this litigation.

We haven’t received any reply so far – if we will, in the future, we will report them in the comment section.

However, we hope this article may also act as a positive stimulus to both companies for giving investors additional disclosure about the litigation in future filings.

The length of the case has exceeded any initial expectation, also due to the coronavirus/COVID-19 pandemic, but it now seems very close to the checkered flag.

A straight-to-the bottom-line cash infusion amounting to tens of million dollars, if our investigation and understanding of the court dockets is correct, could represent a nice unexpected gift for both AVT and BHE shareholders.