Lumentum Holdings has entered into an agreement to snap up Coherent in a cash and stock deal valued at $5.7 billion. Coherent shares rose almost 2% in Wednesday’s pre-market session after closing 30% higher on Tuesday.
The deal is expected to help Lumentum (LITE) enhance its footprint in the more than $10 billion market for lasers and photonics outside of communications and 3D sensing.
Under the terms of the proposed transaction, which has been unanimously approved by the boards of directors of both companies, Coherent stockholders will get $100 per share in cash and 1.1851 shares of Lumentum common stock for each Coherent share they own. The deal value represents a premium of 49% to Coherent’s closing price on January 15. Following the closure of the deal, Coherent shareholders will own about 27% of the combined company.
Lumentum is a global manufacturer of optical and photonic products, including laser applications with next-generation 3D sensing capabilities for telecom products and cloud-based data center networks. Coherent (COHR) is a global provider of lasers and laser-based technology for scientific and medical equipment, commercial and industrial customers.
As a result of the merger, Lumentum expects to generate more than $150 million in annual run-rate synergies within 24 months following the closure of the transaction. The deal is forecasted to be accretive to non-GAAP earnings per share during the first full year after its closure.
“We are thrilled to join forces with Coherent to create one of the world’s largest and most diverse photonics technology companies with leading positions in the growing market for photonics,” said Lumentum CEO Alan Lowe. “By increasing our scale, expanding our portfolio, and bolstering our R&D capabilities at a time when global markets are increasingly relying on photonics products and technologies, we are confident in our combined ability to pursue exciting new growth opportunities.”
Lumentum plans to finance the cash portion of the deal through a combination of cash on hand from the combined company’s balance sheet and $2.1 billion in new debt financing from a fully committed term loan. The acquisition is expected to close in the second half of calendar year 2021, pending approval by Lumentum’s and Coherent’s stockholders and regulatory approvals.
Commenting on the deal, Rosenblatt analyst Ryan Koontz reiterated a Buy rating on the stock with a $100 price target, but questioned whether the combination with Coherent is more of a “financial engineering project aimed at adding EPS at the expense of durable revenue growth.”
“While stated synergy objectives appear achievable in our initial take, and we appreciate the benefits of scale, we question why LITE would make such a big move to diversify further away from its core growth markets in communications and 3D-sensing,” Koontz wrote in a note to investors. (See LITE stock analysis on TipRanks).
The rest of the Street is line with Koontz’s bullish outlook on the stock. The Strong Buy analyst consensus boasts 11 unanimous Buys. The average price target of $111.27 implies upside potential of 18%.