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Lumentum said it would buy Coherent, another laser marker.
Michael Vi / Dreamstime.com
Lumentum Holdings
‘The $ 5.7 billion deal to buy laser maker Coherent is attracting praise and criticism. Wall Street analysts like the increased scale and product diversification that the combination will bring, but some fear that Lumentum is paying dearly.
Lumentum (ticker: LITE) and
Coherent
(COHR) are 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’s shares on Friday.
The deal values Coherent at around 39 times Ebitda – or earnings before interest, taxes, depreciation and amortization – in its last fiscal year, which ended in September. But after redundant cost cuts and other benefits of the merger, that multiple is about 19 times, according to the company’s estimates. Lumentum’s shares – which fell 11% on Tuesday, to around $ 96 – are traded for about 16 times the Ebitda. The two companies had a 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, after
II-VIin
(IIVI) acquisition of Finisar and previous acquisition of Oclaro by Lumentum. The companies involved have been growing and expanding to laser-related products in new markets.
“The acquisition of Coherent will allow Lumentum to revisit the Oclaro acquisition manual, where the integration and scale of the combined entity has generated significant synergies and increased margin,” wrote analyst Samik Chatterjee at JP Morgan, “but in this case, it also offers an opportunity to participate in growth opportunities in broad end markets, in addition to drivers focused on communications and smartphones. “
Coherent’s end markets include semiconductors and other precision manufactures, flat panel displays, advanced packaging and more. This represents a total market of US $ 10.6 billion, against US $ 8.8 billion for Lumentum’s existing products, according to the company. This includes components used in data centers and fiber optic telecommunications networks – in addition to 3-D detection VCSEL and LIDAR matrix chips, which allow their
Apple
(AAPL) iPhone to recognize your face and autonomous cars to avoid obstacles in your way.
Chatterjee raised his Lumentum target price by $ 18 on Wednesday to $ 118, and maintained his rating at the equivalent of Buy. The analyst considers Lumentum to be the main choice in its coverage area for telecommunications equipment and network and IT hardware.
On Tuesday night, Goldman Sachs analyst Rod Hall upgraded Lumentum’s shares to Buy from Hold. He sees stocks rising to $ 117. Lumentum also released preliminary results for its second fiscal quarter on Tuesday, and Hall attributes the 11% fall in shares to weaker than expected numbers. Lumentum is due to release its full earnings report on February 2, before the market opens.
As for the acquisition of Coherent, Hall sees benefits in excess of the expected $ 150 million a year in cost savings – achievable 24 months after closing, says management. Greater scale and diversification could reward Lumentum’s shares with a higher multiple of investors, given potentially more resilient revenues and more growth opportunities.
John Marchetti, of Stifel, also likes the business, but is concerned about the prospects for the broader market for optical components – whether or not to buy. He downgraded Lumentum’s shares to Hold de Buy on Wednesday – with a target price of $ 98.
“We expect the combined company to have limited success in penetrating the Chinese fiber laser market (in addition to component sales), but we believe the portfolio should be more competitive outside China, where fiber lasers are growing steadily and they usually have better profitability ”, he writes.
Coherent shareholders will receive $ 100 per share in cash plus 1.1851 shares of Lumentum for each Coherent share they hold. Combined, they will hold about 27% of the post-merger company. Lumentum will finance the acquisition with cash, plus $ 2.1 billion in new debt.
Wall Street remains highly optimistic about Lumentum’s stock in general, following changes in the rating of these analysts. Ninety-four percent of analysts rate the shares at Buy equivalent, with 6% recommending Hold. The average price target is $ 114.56, according to FactSet, a premium of 19% over current levels.
Lumentum’s shares rose 25% over last year, against a 42% return, including dividends for the
Nasdaq Compound
index. Coherent shares fell 13% through Friday, before a 30% jump on Tuesday, to around $ 200. Lumentum’s shares have gained 137% since then Barron’s recommended buying them in November 2018.
Write to Nicholas Jasinski at [email protected]