Thermo Fisher Buys Life Technologies At A Knock-Out Price

| About: Thermo Fisher (TMO)
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Shares of Thermo Fisher (NYSE:TMO) saw quite a lot of volatility on "Merger Monday." The company which is a world leader in servicing science, announced the anticipated acquisition of Life Technologies (NASDAQ:LIFE) in a $13.6 billion deal.

Shares of Thermo Fisher opened up with gains of 5%, but closed with losses a little over one percent as enthusiasm about the deal faded while equity markets continued to slump. Shares of Life Technologies rose 7.5% to $73.11 per share, trading at a 3.8% discount to Thermo's offer.

The Deal

Thermo Fisher announced that it has agreed to acquire Life Technologies, a global life sciences company. Under terms of the deal, Thermo will pay $76 per share in cash for the shares of the company, or $13.6 billion for the equity of the firm. Thermo will furthermore assume roughly $2.2 billion in net debt held by the firm.

Combined, the deal will create a leader in serving research, specialty diagnostics and applied markets. The technological strength of both firms will accelerate the results in life sciences working in the promising worlds of proteomics, genomics and cell biology.

Life Technologies holds over 5,000 patents and licenses and employs over 10,000 workers across the world.

CEO Marc N. Casper commented on the deal, "We are extremely excited about this transaction because it creates the ultimate partner for our customers and significant value for our shareholders. The acquisition of Life Technologies enhances all three elements of our growth strategy: technological innovation, a unique customer value proposition and expansion in emerging markets."

For the year of 2012, Life Technologies generated annual revenues of $3.8 billion on which the company reported a net profit of $431 million.

The $13.6 billion price tag for the equity of Life values the company at 3.6 times annual revenues and 31-32 times annual earnings.

Thermo Fisher expects to generate adjusted operating income synergies of at least $275 million in three years following the close of the deal, of which $250 million is achieved by cost synergies. The deal will be accretive to adjusted earnings per share by $0.90-$1.00 per share in the first year following completion.

The deal is expected to close early in 2014 and is subject to customary closing conditions, including regulatory approval.


Thermo Fisher ended its fiscal year of 2012 with $855 million in cash, equivalents and short term investments. The company operates with $7.1 billion in short and long term debt, for a net debt position of roughly $6.3 billion. Thermo Fisher will finance the deal by issuing some $9.5-$10 billion in new debt and it will issue $4 million in new equity.

The company generated full year revenues of $12.5 billion, up 8.2% on the year before. Net income fell almost 12% to $1.18 billion, to $3.21 per share. Note that 2011's earnings included a $305 million one-time gain.

Factoring in a decline of little more than one percent, the market values the firm at little above $28 billion. This values the firm's equity at 2.2 times annual revenues and 23-24 times annual earnings.

Thermo Fisher pays a quarterly dividend of $0.15 per share, for an annual dividend yield of 0.8%.

Some Historical Perspective

Long term shareholders in Thermo Fisher have seen very healthy returns. Shares quadrupled over the past decade, increasing from $20 in 2003 to highs of $60 in 2008. Shares halved during the recession and steadily recovered to trade at all time highs around $84 earlier in Monday's trading session.

Between 2009 and 2012, Thermo Fisher increased its revenues by little over a quarter from $9.9 billion to $12.5 billion. Net income increased by almost 40% to $1.18 billion in the meantime. Earnings per share increased even faster as the company retired roughly 14% of its shares outstanding over the past four years.

Investment Thesis

The $76 offer made by Thermo Fisher is a knock-out offer and has already been approved by the board of directors of both the companies.

The offer represents a roughly 25% premium over the share price level around $60 at the start of the year, when the company announced a strategic review of its future direction. Competing bids for Life Technologies came in from Sigma-Aldrich and a consortium from Blackstone and Carlyle, among others. This obviously drove up the price, but investors in Thermo Fisher appear to be relieved now a deal finally has gone through.

The deal will increase annual revenues of Thermo Fisher by some 30% and increase earnings by some 36%, excluding synergy estimates. The price tag is pretty steep as the bidding war pushed up the price to 3.6 times annual revenues, a sizable 60-65% premium compared to Thermo Fisher's own valuation. The price tag values shares at 31-32 times annual earnings, a 35% premium compared to Thermo's own valuation.

Yet the synergy estimates, exceeding $275 million per annum in three years time, make up a lot. Assuming statutory tax rates, after tax income could increase by roughly $175 million per annum valuing the deal at 21-22 times earnings.

As a result of the deal, the net debt position of the combination will increase significantly. The current combined net debt position of $8.5 billion will increase by another $9.5-$10 billion following the deal, resulting in a sizable $18 billion net debt position. The remaining $4 billion will be financed by diluting Thermo Fisher's shareholder base by some 15%.

The deal values the combined entity at roughly 2.0 times annual pro-forma revenues of $16.3 billion in 2012, and 20 times annual earnings of $1.6 billion. These are still steep valuations for a levered firm. Yet the new company will hold a strong position in the global market for genetic testing behind Illumina (NASDAQ:ILMN). If the deal will be executed correctly, the company could benefit from the faster growth in the gene market.

The long term prospects look undoubtedly good, but shares have already been priced for perfection at high earnings multiples while the balance sheet will be highly leveraged. Investors should wait for the first quarter earnings report in little over a week, on the 24th of April, and carefully listen out to further clues from management about the impact of the deal on medium to long term earnings.

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.