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Lumentum said it will buy Coherent, another laser marker.
Michael Vi / Dreamstime.com
Lumentum Holdings
A $ 5.7 billion deal to buy fellow laser maker Coherent has received both praise and criticism. Wall Street analysts appreciate the greater scale and product diversification that the combination brings, but some worry that Lumentum is overpaying.
Lumentum (ticker: LITE) and
Cohesive
(COHR) are both focused on optical components – lasers – for a wide variety of applications. The cash-and-stock deal, announced Tuesday, came in at a premium of nearly 50% over Coherent Stock’s previous close on Friday.
The agreement values Coherently at about 39 times Ebitda – or earnings before interest, taxes, depreciation and amortization – in the last fiscal year, which ended in September. But after excess cost savings and other merger benefits, that multiple is more than 19 times, according to the company’s estimates. The Lumentum stock – which fell 11% to about $ 96 on Tuesday – is trading for about 16 times Ebitda. The two companies had combined sales of $ 2.9 billion in the past year.
The deal is the latest step in a wave of consolidation in the optical components industry in recent years
II-VI‘s
(IIVI) acquisition of Finisar and Lumentum’s previous acquisition of Oclaro. The companies involved are growing and expanding into laser-related products in new markets.
“The Coherent acquisition allows Lumentum to revisit the Oclaro acquisition playbook, where the integration and scale of the combined entity has generated significant synergies and margin growth,” JP Morgan analyst Samik Chatterjee wrote, ” but in this case also an opportunity to participate in growth opportunities in broad markets that go beyond the targeted drivers in communication and smartphone. “
Coherent’s end markets include semiconductor and other precision manufacturing, flat panel displays, advanced packaging and more. According to the company, those account for a total addressable market of $ 10.6 billion, versus $ 8.8 billion for Lumentum’s existing products. These include components used in data centers and fiber optic telecom networks, plus 3D sensing VCSEL and LIDAR array chips, enabling your
Apple
(AAPL) iPhone to recognize your face and self-driving cars to avoid obstacles in their path.
Chatterjee raised his Lumentum price target by $ 18 to $ 118 on Wednesday, keeping his rating on the equivalent of Buy. The analyst calls Lumentum the best choice in its coverage area for telecom and network equipment and IT hardware.
On Tuesday night, Goldman Sachs analyst Rod Hall upgraded Lumentum’s stock to Buy from Hold. He sees the stock rise to $ 117. Lumentum also reported preliminary fiscal second quarter results on Tuesday, and Hall attributes the stock’s 11% decline to weaker than expected numbers. Lumentum will publish its full earnings report on Feb. 2 before the market opens.
As for the Coherent acquisition, Hall sees benefits beyond the projected $ 150 million per year in cost savings – achievable within 24 months of closing, management said. Larger scale and diversification could reward Lumentum stocks with a higher multiplicity of investors, given potentially more resilient earnings and more growth opportunities.
Stifel’s John Marchetti also likes the deal, but is concerned about the prospects for the broader optical components market – acquisition or not. He downgraded Lumentum stock to Hold from 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 (apart from selling components), but we believe the portfolio should be more competitive outside of China, where fiber lasers are growing steadily and typically have better profitability, ”he writes. .
Cohesive shareholders will receive $ 100 per share in cash plus 1.1851 Lumentum shares for each related share they own. Combined, they will own about 27% percent of the postal service. Lumentum will fund the acquisition with cash plus $ 2.1 billion in new debt.
Wall Street in general remains very optimistic about Lumentum’s shares after these analysts’ rating changes. Ninety-four percent of analysts rate the stock on the equivalent of Buy, with 6% recommending Hold. Their average price target is $ 114.56, according to FactSet, a 19% premium over the current level.
The Lumentum share has risen 25% in the past year, against a return of 42% including dividends for the
Nasdaq Composite
table of contents. The related stocks fell 13% through Friday, before rising 30% to about $ 200 on Tuesday. Since then, Lumentum’s shares are up 137% Barron’s recommended buying them in November 2018.
Write to Nicholas Jasinski at [email protected]