Text size
Lumentum said it will buy Coherent, another laser marker.
Michael Vi / Dreamstime.com
Lumentum Holdings
‘A $ 5.7 billion deal to buy Coherent laser manufacturing partners is being praised and criticized. Wall Street analysts like the scaling up and product diversification that the combination will bring, but some worry that Lumentum will pay too much.
Lumentum (ticker: LITE) i
Coherent
(COHR) focus on optical components (lasers) for several different applications. The cash and stock deal, announced on Tuesday, meant a premium of almost 50% over the previous close of Coherent shares on Friday.
The agreement values Coherent approximately 39 times the Ebitda, or earnings before interest, taxes, depreciation and amortization, in its last financial year, which ended in September. But after redundant cost reductions and other merger benefits, that multiple more than resembles 19 times, according to company estimates. Shares of Lumentum, which fell 11 percent on Tuesday to $ 96, are trading at about 16 times Ebitda. The two companies earned combined revenues of $ 2.9 billion over the past year.
The agreement is the latest move in a wave of consolidation in the optical components industry in recent years, which continued
II-VI‘s
(IIVI) acquisition of the old acquisition of Oclar of Finisar and Lumentum. The companies involved have been growing and expanding into laser-related products in new markets.
“The consistent acquisition will allow Lumentum to revisit Oclaro’s book of acquisitions, where the integration and scale of the combined entity have driven significant synergies and increased margin,” wrote JP Morgan analyst , Samik Chatterjee, “but in this case they also provide the opportunity to participate in growth opportunities in wide-ranging markets beyond the engines focused on communications and smartphones.”
Coherent’s end markets include semiconductor and other precision manufacturing, flat panel displays, advanced packaging and more. These represent a total market of $ 10.6 billion, compared to $ 8.8 billion of Lumentum’s existing products, according to the company. These include components used in data centers and fiber optic telecommunications networks, as well as 3D detection VCSEL and LIDAR matrix chips, which allow
apple
(AAPL) iPhone to recognize the face and cars that drive automatically to avoid obstacles in its path.
Chatterjee raised its Lumentum price target by $ 18 on Wednesday to $ 118 and maintained its rating on the equivalent of Buy. The analyst considers Lumentum the best option in its area of coverage of telecommunications and networking equipment and computer hardware.
On Tuesday night, Goldman Sachs analyst Rod Hall updated Lumentum shares to buy on Hold. He sees the shares go up to $ 117. Lumentum also reported on Tuesday the preliminary results of its second fiscal quarter and Hall attributes the 11% drop in shares to lower figures than expected there. Lumentum is scheduled to release its full profit report on February 2 before opening the market.
In terms of consistent acquisition, Hall sees profits in excess of the projected $ 150 million annual cost savings, achievable within 24 months of closing, according to management. Greater scale and diversification could reward Lumentum shares 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 of the broader market for optical components — acquisition or not. On Wednesday, it downgraded Lumentum’s shares to hold on Buy, with a target price of $ 98.
“We expect the combined company to have limited success in penetrating the Chinese fiber laser market (beyond component sales), but we believe the portfolio should be more competitive outside of China, where fiber lasers they have a steady growth and usually have a better profitability, ”he writes. .
Coherent shareholders will receive $ 100 per cash share plus 1,1851 Lumentum shares for each coherent share they hold. Combined, they will own 27% of the post-merger company. Lumentum will finance the acquisition with cash plus $ 2.1 billion in new debt.
Wall Street remains highly bullish on Lumentum shares overall after rating changes by these analysts. Ninety-four percent of analysts value stocks at the Buy equivalent, and 6% recommend holding. According to FactSet, its average target price is $ 114.56, a 19% premium over current levels.
Lumentum shares have risen 25% over the past year, compared to a 42% return, including currency dividends
Nasdaq Composite
index. Coherent stocks fell 13% through Friday, before jumping 30% on Tuesday to about $ 200. Lumentum shares have gained 137% since then De Barron it is recommended to buy them in November 2018.
Write to Nicholas Jasinski to [email protected]