By Stephen Nellis and Max A. Cherney
(Reuters) -Intel expects the U.S. government to reduce a preliminary subsidy of $8.5 billion to build more chip factories, two sources familiar with the matter said on Monday, weeks after the company received a separate $3 billion deal with the Pentagon.
The $8.5 billion in direct grants were part of a larger package of loan guarantees, tax incentives and other measures announced in March. A final agreement is expected in coming days, one of the sources said.
Reuters could not learn the likely amount of Intel (NASDAQ:INTC)'s final direct grant funding, but one of the sources said the amount was likely to be greater than $7.5 billion.
Shares were up 2% in early afternoon trading.
Intel in September won a $3 billion contract with the U.S. Department of Defense. Funding for the Pentagon contract ended up coming from the $39 billion that U.S. lawmakers allocated for chip subsidies rather than the Pentagon's budget, which led to a reduction in Intel's direct grant award, the person said.
The grant reduction was not connected to Intel's broader struggles this year, the person said. Margins have narrowed and the chipmaker has laid off thousands of employees.
The problems follow years of heavy spending by Chief Executive Pat Gelsinger that has not revived the once-dominant chipmaker. Intel's shares have slid 47% so far this year, and its market value has plummeted below that of once-smaller rivals such as Qualcomm (NASDAQ:QCOM) and Advanced Micro Devices (NASDAQ:AMD). Intel's depressed stock price has spurred takeover interest.
A U.S. Department of Commerce spokesman declined to comment on Intel's award, which is not yet final.
This spring U.S. President Joe Biden's administration said it was awarding Intel nearly $20 billion in grants and loans, supercharging the company's domestic semiconductor chip output and marking the government's largest outlay to subsidize leading-edge chip production.
The U.S. announced a preliminary agreement for $8.5 billion in grants and up to $11 billion in loans for Intel in Arizona in March, with some of the funding to be used to build two new factories and modernize an existing one.
The outlay is part of the 2022 CHIPS and Science Act, a bid to boost domestic semiconductor output with $52.7 billion in funding, including $39 billion in subsidies for semiconductor production and $11 billion for research and development.
Rivals TSMC and GlobalFoundries (NASDAQ:GFS) are among more than 20 companies awarded preliminary agreements through the Act.
The $3 billion in funding for Intel from the U.S. Defense Department is to help the Pentagon build a secure U.S. supply chain for chips. Congress in March decided that funding would come from the same pool as $39 billion in CHIPS Act grants.
Politico reported that some lawmakers objected to that move because Intel was seen as the most likely recipient for funding for the classified project.