(Corrects paragraphs 1 and 5 to make clear the deal will reduce AMD's debt, not eliminate it completely)
By David Lawsky
SAN FRANCISCO, Oct 7 (Reuters) - Chip maker Advanced Micro Devices AMD.N will hive off its pricey manufacturing plants, get a cash injection and shrink its debt to compete harder against bigger rival Intel (INTC.O) for market share, sources familiar with the situation said.
The formal announcement was set for Tuesday morning, the sources said.
Two Abu Dhabi state-owned venture capital companies are backing the move. One will put up at least $5.7 billion into the spun off factories and the other will buy more than $300 million in AMD stock and warrants.
Wall Street for months has waited for struggling AMD to formulate plans to split up the company, a so-called 'smart asset' strategy aimed at letting the company invest more in developing chips and less in costly factories.
The new factory-owning Foundry Company will assume all $1.2 billion of AMD's manufacturing operations debt so the remaining firm can compete hard against Intel, which sells about 80 percent of the central processing units at the heart of the world's 1 billion personal computers. AMD makes the rest.
AMD has always struggled against its bigger competitor and in the last few years was forced to weigh the price of its pride in owning the fabricating plants, or "fabs," which most other chip makers gave up long ago.
AMD has lost market share since it was hit by problems with its high-end personal computer and server Barcelona chip, and had bumps along the road after acquiring graphics chip maker ATI. The European Commission has charged Intel illegally paid computer makers and retailers to avoid AMD.
The Foundry Company plans to break ground next year for a factory in upstate New York employing 1,400 people, if New York state will transfer financial incentives to the new company.
The chief executive will be Doug Grose, senior vice president of technology at AMD, and its new chairman will be Hector Ruiz, now chairman of AMD.
The Foundry Company will upgrade an existing AMD plant in Dresden, Germany, and build the plant in New York to the latest technology standards.
Abu Dhabi's Advanced Technology Investment Company (ATIC) will hold half the board seats and own 55 percent of the Foundry Company, its temporary name. AMD will have the rest and the company will be on AMD's balance sheet.
The 3,000-person company will make all of AMD's central processing units as well as chips for other companies.
ATIC will invest an initial $2.1 billion, paying $700 million directly to AMD. After that, it will invest an additional $3.6 billion to $6 billion over five years.
Mubadala Development Co., an Abu Dhabi government company which holds stakes in sectors ranging from energy to aerospace, purchased an 8.1 percent share of AMD in 2007 for $622 million. It will increase that to 19.3 percent and gain a seat on AMD's board, paying $314 million for 58 million newly issued shares and warrants for 30 million more.
The deal is to close at the end of 2008 or early in 2009, if approved by stockholders. It will also be reviewed by the U.S. government inter-agency Committee on Foreign Investments in the United States (CFIUS).
The deal will be welcomed by IBM, which has worked closely with AMD and other chip makers to improve chips. The company will be part of the IBM technology alliance, making it easier to build chips for members.
Reporting by David Lawsky; Editing by Kim Coghill