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Lumentum said he would buy Coherent, another laser marker.
Michael Vi / Dreamstime.com
Lumentum Holdings
The $ 5.7 billion deal to buy another Coherent laser maker is garnering both praise and criticism. Wall Street analysts appreciate the increased breadth and product diversification the combination will bring, but some fear Lumentum is paying too much.
Lumentum (symbol: LITE) and
Coherent
(COHR) are both focused on optical components – lasers – for a variety of different applications. The cash and stock deal, announced on Tuesday, came with a premium of nearly 50% over the previous close of Coherent stock on Friday.
The deal values Coherent at around 39 times EBITDA – or earnings before interest, taxes, depreciation and amortization – in its most recent fiscal year, which ended in September. But after redundant cost reductions and other benefits of the merger, that multiple is more than 19 times, according to company estimates. Lumentum stock – which fell 11% on Tuesday to around $ 96 – is trading at around 16 times Ebitda. The two companies achieved combined revenue of $ 2.9 billion last year.
The deal is the latest move in a wave of consolidation in the optical components industry in recent years, following
II-VIof
(IIVI) Acquisition of Finisar and previous takeover of Oclaro by Lumentum. The companies involved have grown and developed into laser related products in new markets.
“The acquisition of Coherent will allow Lumentum to revisit the playbook of the Oclaro acquisition, where the integration and scale of the combined entity has resulted in significant synergies and increased margins,” wrote Samik Chatterjee , analyst at JP Morgan, “But in this case, it also offers the opportunity to participate. growth opportunities in large end markets, beyond the main drivers of communications and smartphones. “
Coherent’s end markets include semiconductor manufacturing and other precision products, flat panel displays, advanced packaging, and more. These represent a total addressable market of $ 10.6 billion, compared to $ 8.8 billion for Lumentum’s existing products, according to the company. These include components used in data centers and fiber optic telecommunications networks, as well as 3D sensing VCSEL and LIDAR matrix chips,
Apple
(AAPL) iPhone to recognize your face and self-driving cars to avoid obstacles in their path.
Chatterjee raised its Lumentum price target from $ 18 on Wednesday to $ 118 and maintained its rating at the equivalent of Buy. The analyst qualifies Lumentum as first choice in its coverage area of telecommunications and network equipment and computer hardware.
Goldman Sachs analyst Rod Hall upgraded Lumentum’s stock to buy on Hold on Tuesday night. He sees the stock go up to $ 117. Lumentum also released preliminary results for its fiscal second quarter on Tuesday, and Hall attributes the stock’s 11% drop to weaker-than-expected numbers. Lumentum is expected to publish its full report on its results on February 2 before the market opens.
When it comes to the Coherent acquisition, Hall sees benefits beyond the projected $ 150 million per year in cost savings – achievable within 24 months of closing, according to management. Greater scale and greater diversification could reward Lumentum’s stock with a higher multiple of investors, given potentially more resilient income and more growth opportunities.
John Marchetti of Stifel also likes the deal, but is worried about the prospects for the broader optical components market – acquisition or not. It downgraded Lumentum’s stock to Hold from Buy on Wednesday – with a price target of $ 98.
“We expect the merged company to experience limited success in entering the Chinese fiber laser market (beyond component sales), but believe the portfolio should be more competitive outside of China, where fiber lasers are growing steadily and are generally more cost effective, ”he writes. .
Coherent shareholders will receive $ 100 per share in cash plus 1.1851 Lumentum share for each Coherent share they own. Together, they will own around 27% percent of the post-merger company. Lumentum will finance the acquisition with cash and $ 2.1 billion in new debt.
Wall Street remains very optimistic on the title Lumentum as a whole after the rating changes of these analysts. Ninety-four percent of analysts rate the stock as equivalent to Buy, and 6% recommend Hold. Their average price target is $ 114.56, according to FactSet, a 19% premium from current levels.
Lumentum shares are up 25% over the past year, against a return of 42%, including dividends for the
Nasdaq composite
index. The consistent stock was down 13% through Friday, before jumping 30% on Tuesday, to around $ 200. Lumentum shares have gained 137% since Barron’s recommended to buy them in November 2018.
Write to Nicholas Jasinski at [email protected]
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