LTX-Credence: Truly Transformational Deal Reveals Upside Potential

| About: Xcerra Corporation (XCRA)

Shares of LTX-Credence (LTXC) jumped up an incredible 38% in Friday's trading session. The provider of automated test equipment for the semiconductor industry announced a transformational acquisition of Multitest and Everett Charles Technologies.

Following the deal, LTX will almost triple its annual revenues, return to profitability and reap great synergies.

On the back of the great deal, conditional upon further research, I might take a long position tin the stock.

The Deal

LTX-Credence announced that it has entered into a definitive agreement to acquire the Multitest and the Everett Charles Technologies business of Dover Corporation (NYSE:DOV).

LTX will pay $93.5 million for the acquired businesses. The company will pay $73.5 million in cash, with the remainder $20 million being paid by issuing promissory notes.

With the deal, LTX hopes to make an important set in the evolution of semiconductor test cells. According to the company the combination will create the only provider of comprehensive test solutions for the semiconductor and printed circuit board markets.

The deal will increase efficiency, while accelerating the time to high-volume production. The deal will also diversify into printed circuit board and printed circuit board assembly.

On a pro-forma basis, LTX would have generated $420 million in revenues over the past 12 months. The deal is expected to be immediately accretive to earnings.

Annual recurring revenues should increase toward $240 million, while expected synergies are seen around $15 million per annum.

The deal is expected to close before the end of this calendar year and is subject to normal closing conditions, including regulatory approval.


LTX-Credence ended its fourth quarter of its fiscal 2013 with $124.4 million in cash and equivalents. The company has no outstanding debt, for a solid net cash position.

Full year revenues for its fiscal 2013 came in at $152.0 million, up 15.1% on the year before. While revenue growth was solid, the company was still losing money. Net losses narrowed from $19.9 million last in 2012 to $12.1 million.

Trading at $5.80 per share, the market values LTX-Credence at $275 million, or its operating assets at $150 million. This values the operations at roughly 1.0 times annual revenues.

Given the losses, LTX-Credence does not pay a dividend at the moment.

Some Historical Perspective

While investors should be happy with the jump upwards in the share price, the long term share price performance has been dramatic. Shares peaked around $150 in 2000, amidst the internet bubble, and have steadily fallen from $50 in 2004 to lows of just $1 in 2009.

Shares rose to highs of $10 in 2010, but fell back to lows of $4 in recent weeks following the fourth quarter earnings report. Following Friday's jump shares trade around $5.80 per share.

Between the fiscal year of 2010 and 2013, LTX-Credence has seen its annual revenues fall by 30% to $152 million, despite last year's growth. After reporting a $18 million profit in 2010, LTX has reported a full year loss of $12 million over the past year.

Deal Multiples And Implications

To call the deal transformational for LTX-Credence would be an understatement.

To illustrate, LTX-Credence posted a pro-forma impact of the deal for the fourth quarter on its website. Fourth quarter revenues of its own business totaled $37.5 million, gross margins 53%, while the company posted an operating loss of $3.3 million.

The acquired activities generated fourth quarter revenues of $72.0 million, while posting gross margins of 32% and operating income of $5.2 million. Now add to that $3.8 million in quarterly synergies and combined operating income is seen around $5.7 million.

Before the deal was announced, the $4.20 price tag valued the firm at $200 million and operating assets at merely $75 million given the solid cash balances. This valued the operations at 0.5 times annual revenues of $152 million.

Note that LTX only paid $93.5 million to acquire Multitest and ECT. These activities generated revenues of $264 million, valuing the business at 0.35 times revenues. Pro-forma operating income was $14 million, valuing the business at 6.7 times that metric.

Given that the acquired activities are bought at lower price/sales ratios, are profitable, and boost recurring revenues from 22% to 54% of total revenues, it seems that the company has done a stellar deal.

Note that this has even entirely excludes $15 million in annual cost synergies, which alone could justify a $93.5 million price tag.

Investment Thesis

The new valuation has risen to some $275 million, while the net cash position will fall to $30 million, valuing operations at $245 million.

The new combination will generate $416 million in annual revenues, operating income of $3 million and pro-forma EBITDA of $21 million. Factoring in $15 million in synergies at statutory tax rates and operating income could come in around $13 million, on EBITDA of $36 million. Therefore operations are valued at 0.6 times annual revenues, 18-19 times operating income and 6.8 times EBITDA.

To summarize, the deal makes the overall company profitable, the valuation more appealing, and will result in significant scale and synergies, allowing LTX to attack a $5 billion addressable market.

Besides the financial impact, the comprehensive test call products, greater efficiency of testing and acceleration of high-volume production in a range of key markets, are boosting the competitive position.

All in all, this is a great deal for LTX-Credence. The deal will result in profitability, boost revenues by some 175%, make the business more stable, create significant value by synergies while boosting the competitive and scale offering of the business.

While there are definitely execution risks related to such a relative large deal for a small company, LTX should be able to do just fine given the solid state of the finances even after the deal. The historical financial performance of the unit reveals that the volatility of the acquired activities is not that much different from LTX itself.

I tend to not invest in small-capitalization firms, yet I might do more research into this deal and name in the coming days to possibly initiate a long position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.