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Intel ( INTC ) got separate $3 billion Pentagon contract in

September

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Intel ( INTC ) sees chip-making subsidies exceeding $7.5 bln,

source says

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Shares up 2% in early afternoon trading

(Adds reference to other chip makers)

By Stephen Nellis and Max A. Cherney

Nov 25 (Reuters) - Intel ( INTC ) 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's ( INTC )

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 ( INTC ) 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 ( INTC ) direct grant award, the person said.

The grant reduction was not connected to Intel's ( INTC ) 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 ( INTC ) shares have slid 47% so far this year, and

its market value has plummeted below that of once-smaller rivals

such as Qualcomm ( QCOM ) and Advanced Micro Devices ( AMD ).

Intel's ( INTC ) depressed stock price has spurred takeover interest.

A U.S. Department of Commerce spokesman declined to comment

on Intel's ( INTC ) award, which is not yet final.

This spring U.S. President Joe Biden's administration said

it was awarding Intel ( INTC ) 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 ( INTC ) 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 ( GFS ) are among more than 20

companies awarded preliminary agreements through the Act.

The $3 billion in funding for Intel ( INTC ) 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 ( INTC ) was seen as the most likely recipient for funding

for the classified project.