Coherent shareholders will receive $100/share in cash and 1.1851 shares of Lumentum common stock for each Coherent share they own
Shares of Lumentum (LITE) are under pressure on Tuesday after the company agreed to buy laser maker Coherent (COHR) for $5.7B. Commenting on the news that sent the shares of the latter soaring, Craig-Hallum told investors he sees the deal as "a good fit in many ways," with the biggest upside potential from Lumetum applying its manufacturing and supply experience to the Coherent business that "appears to be in need of exactly this transformation."
COHERENT ACQUISITION: Lumentum and Coherent announced that they have entered into a definitive agreement under which Lumentum will acquire Coherent in a cash and stock transaction valued at $5.7B. Under the terms of the agreement, which has been unanimously approved by the boards of both companies, Coherent stockholders will receive $100.00 per share in cash and 1.1851 shares of Lumentum common stock for each Coherent share they own. At closing, Coherent stockholders are expected to own approximately 27% percent of the combined company.
The combination unites Coherent's photonics and lasers businesses with Lumentum's telecom, datacom, and 3D sensing photonics businesses, creating a photonics technology company with increased scale and market reach. The company said the combination accelerates Lumentum's penetration of the more than $10B market for lasers and photonics outside of the communications and 3D sensing applications. The combined company is expected to generate more than $150M in annual run-rate synergies within 24 months of the closing of the transaction. The transaction is expected to be accretive to the combined company's non-GAAP earnings per share during the first full year after the close of the transaction. The transaction value represents a premium of 49% to Coherent's closing price on January 15. The transaction is expected to close in the second half of calendar year 2021, subject to approval by Lumentum's and Coherent's stockholders, receipt of regulatory approvals and other customary closing conditions.
Lumentum also reported preliminary second quarter earnings per share between $1.91-$1.99, with consensus at $1.82, and revenue of $478.8M, with consensus at $479.63M. The company also reported preliminary second quarter operating margin of 34%-35.5%.
'A GOOD FIT IN MANY WAYS': Commenting on the announcement, Craig-Hallum analyst Richard Shannon said he believes Lumentum's proposed acquisition of Coherent is "a good fit in many ways," including for scale and diversification. He sees the biggest upside potential from Lumentum applying its strong manufacturing and supply experience to the Coherent business that "appears to be in need of exactly this transformation." Lumentum's stock is down more than he would have thought initially, and Shannon believes it's being driven by concerns about the increasing exposure to the consumer electronics industry - Coherent has exposure via OLED screens used in smartphones from Apple (AAPL) and others - which the analyst believes has hampered Lumentum's valuation. Over time, Shannon thinks the increased scale and diversification with the upside potential on synergies will drive Lumentum's stock to materially higher levels. He would be a buyer of the stock at these levels. The analyst has a Buy rating and a price target of $120 on Lumentum's shares.
PRICE ACTION: In afternoon trading, shares of Lumentum have dropped over 10% to $95.31, while Coherent's stock has gained almost 31% to $199.04.