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Lumentum said it was going to buy Coherent, another laser marker.
Michael Vi / Dreamstime.com
Lumentum Holdings
‘The $ 5.7 billion deal to buy co-laser manufacturer Coherent is commendable. Wall Street analysts like the larger scale and the diversification of products that the combination will bring, but some are worried that Lumentum is paying too much.
Lumentum (ticker: LITE) en
Coherent
(COHR) are both focused on optical components – lasers – for different applications. The cash-and-stock deal, announced Tuesday, had a premium of nearly 50% on the previous closing period of the coherent stock.
The agreement coherently values Ebitda approximately 39 times – or earnings before interest, tax, depreciation and amortization – in its most recent financial year, which ended in September. But after surplus cost savings and other merger benefits, the multiple is more than 19 times, according to company estimates. Lumentum shares – which fell 11% on Tuesday to about $ 96 – traded around 16 times Ebitda. The two companies had a total revenue of $ 2.9 billion in the past year.
The agreement is the latest step in a wave of consolidation in the optical components industry in recent years
II-VIsay
(IIVI) acquisition of Finisar and Lumentum’s previous acquisition of Oclaro. The businesses involved have been growing and expanding into laser-related products in new markets.
“The cohesive acquisition will enable Lumentum to revisit the Oclaro acquisition gamebook, where the integration and scope of the joint entity caused significant synergies and margin increases,” wrote JP Morgan analyst Samik Chatterjee, “but in this case it also offers the opportunity to participate in growth opportunities in broad markets outside the focused drivers of communications and smartphones. ”
Coherent’s end markets include semiconductor and other precision fabrication, flat screens, advanced packaging and more. According to the company, there is a total liable market of $ 10.6 billion, compared to $ 8.8 billion for Lumentum’s existing products. These include components used in data centers and fiber optic telecommunications networks – plus 3D-enabled VCSEL and LIDAR chips, which allow you to
appeal
(AAPL) iPhone to recognize your face and self-driving cars to avoid obstacles in their path.
On Wednesday, Chatterjee raised its Lumentum price target by $ 18 to $ 118, and maintained its rating at the Buy equivalent. The analyst calls Lumentum the best choice in its telecommunications and networking equipment and IT hardware coverage.
Goldman Sachs analyst Rod Hall upgraded Lumentum shares on Tuesday night to buy at Hold. It sees shares rise to $ 117. Lumentum also reported preliminary results for its fiscal second quarter on Tuesday, with Hall attributing the 11% drop in the share to weaker-than-expected numbers there. Lumentum will announce its full earnings report on February 2 before the market opens.
In terms of cohesive acquisition, Hall sees benefits over the expected cost savings of $ 150 million per year – which can be achieved within 24 months of closing, management says. Greater scale and diversification could reward Lumentum stocks with a higher multiple of investors, given potentially more resilient income and more growth opportunities.
Stifel’s John Marchetti also likes the deal, but is concerned about the prospects for the broader market for optical components – acquisition or not. He downgraded Lumentum’s shares to Hold from Buy on Wednesday – with a price target of $ 98.
“We expect the combined company to have limited success in entering the Chinese fiber laser market (excluding component sales), but believe that the portfolio should be more competitive outside China, where fiber lasers see steady growth and generally have better profitability,” he writes. .
Cohesive shareholders will receive $ 100 per share in cash plus 1,1851 shares of Lumentum shares for each cohesive share they own. Together they will own approximately 27% of the company after the merger. Lumentum will finance the acquisition with cash on hand plus $ 2.1 billion in new debt.
Wall Street generally remains very positive about Lumentum shares after the changes from these analysts. Ninety-four percent of analysts rate the stock at the equivalent of Buy, while 6% recommend Hold. Their average price target is $ 114.56, according to FactSet, a 19% premium to current levels.
Lumentum’s share has risen by 25% over the past year, compared to a return of 42% including dividends for the
Nasdaq Compound
index. Cohesive shares fell 13% to Friday, before falling 30% on Tuesday, to about $ 200. Lumentum shares have risen 137% since then Barron’s recommends buying it in November 2018.
Write to Nicholas Jasinski by [email protected]