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Lumentum said it will buy Coherent, another laser marker.
Michael Vi / Dreamstime.com
Lumentum Holdings
“The $ 5.7 billion deal to buy fellow laser maker Coherent attracts both praise and criticism. Wall Street analysts like the increased scale and diversification of products the combination will bring, but some fear Lumentum is overpaying.
Lumentum (ticker: 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, had a premium of almost 50% over the previous closing of coherent shares on Friday.
The deal is consistent about 39 times Ebitda – or earnings before interest, taxes, depreciation and amortization – in its last fiscal year, which ended in September. But after reducing redundant costs and other merger benefits, that multiple is more than 19 times, according to company estimates. Lumentum – which fell 11% on Tuesday to about $ 96 – is trading about 16 times Ebitda. The two companies had a combined revenue of $ 2.9 billion in the last year.
The agreement is the latest move in a wave of consolidation in the optical components industry in recent years, since then
II-VIS
(IIVI) the acquisition of the previous takeover by Finisar and Lumentum of Oclaro. The companies involved have grown and expanded into laser-related products in new markets.
“Consistent acquisition will allow Lumentum to review the Oclaro procurement game, where the integration and scale of the combined entity have led to significant synergies and increased margins,” wrote JP Morgan analyst Samik Chatterjee, “but in this case it also offers an opportunity to participate.” in growth opportunities in large markets, beyond drivers focused on communications and smartphones. ”
Coherent’s final markets include semiconductor manufacturing and other precision products, flat panel displays, advanced packaging and more. They 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 – plus VCSEL and 3-D matrix chips with three-dimensional detection, which allow you to
Apple
(AAPL) iPhone to recognize your face and cars with automatic driving to avoid obstacles in their path.
Chatterjee raised its Lumentum price target by $ 18 to $ 118 on Wednesday and maintained its rating at the Buy equivalent. The analyst calls Lumentum the best choice in its field of telecommunications and network equipment and IT hardware.
On Tuesday night, Goldman Sachs analyst Rod Hall updated Lumentum shares to buy them from Hold. He sees shares rising to $ 117. Lumentum also reported preliminary results for the second fiscal quarter on Tuesday, with Hall attributing the 11% drop in stocks to lower-than-expected figures. Lumentum is scheduled to launch its full revenue report on February 2 before the market opens.
In terms of consistent procurement, Hall sees benefits of more than $ 150 million a year in cost savings – achievable within 24 months of closing, management says. Larger scale and diversification could reward Lumentum stock with a larger multiple from investors, given potentially stronger revenues and more growth opportunities.
John Marchetti, from Stifel, also likes the business, but is worried about the prospects of the wider optical components market – purchase or not. He downgraded Lumentum shares to hold on Buy on Wednesday – with a target price of $ 98.
“We expect the combined company to have limited success in entering the Chinese fiber laser market (beyond selling components), but we believe the portfolio should be more competitive outside of China, where fiber lasers are growing steadily and they usually have a better return, “he writes.
Coherent shareholders will receive $ 100 per share in cash plus 1,1851 shares of Lumentum share for each coherent share they hold. Combined, they will own about 27% of the post-concentration company. Lumentum will finance the cash acquisition plus $ 2.1 billion in new debt.
Wall Street remains extremely optimistic about the Lumentum stock in general, after the rating changes of these analysts. Ninety-four percent of analysts rate the stock at the equivalent of Buy, with 6% recommending Hold. Their average target price is $ 114.56, according to FactSet, a 19% premium over current levels.
Lumentum has increased by 25% in the last year, compared to a return of 42%, including dividends for
Nasdaq Composite
index. Coherent stocks fell 13% through Friday, before jumping 30% on Tuesday to about $ 200. Lumentum shares have gained 137% since then Barron’s recommended to buy them in November 2018.
Write to Nicholas Jasinski at [email protected]