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Life Technologies At $65-$75 Is A Good Deal For Roche

|About: aTyr Pharma (LIFE), Includes: ILMN, TMO

An interesting development in the healthcare sector led to double digit returns for Life Technologies Corp (NASDAQ:LIFE). Life Technologies Corp is one of the true breakthrough technology companies of our time. The company develops gene sequencing products, including products, devices, and tools that can be found at just about every large pharmaceutical company throughout the country, and beyond. The company is a leading expert in cell imaging and analysis, DNA and RNA, and research for the newest theories in medicine. And now, the company might be preparing for a major shift in ownership.

Life Technologies Corp is a stock that I have owned for many years, and a company that I have always found interesting. It is not a high-growth company, rather a consistent performer that could see organic growth of 10% depending on the segments in which it operates. On Friday the stock traded to new highs with a 10% gain in the early session, after reporting that it has hired Deutsche Bank and Moelis to assist in its annual strategic review. For the last few months there have been rumors of a potential move on behalf of the company; this adds further fuel to the fire.

At this time it is unclear as to what type of "strategic" move the company may be looking to make. We don't know if it's looking at a private equity buyout, a leveraged buyout, or perhaps another global industry player will look to swoop in and make an offer. The only thing we know is that there is now some substance to the rumors of a strategic move; the company is attracting some interest and believes a deal could be made.

The most important questions for investors such as myself is will the deal occur, who will buy the company, and what is a fair price? First, of course the private equity conversation comes into play, but considering the fact that a company will want to scale up Life's business it might be a hard accomplishment for a company without a sizable pharmaceutical segment. Therefore, it's more likely that a pharma company will purchase Life, and all indications suggest it will be Roche.

Roche is attractive as a potential suitor for three reasons: It is the world's largest maker of cancer drugs; it failed to acquire a similar company in Illumina (NASDAQ:ILMN), and Life's technology could be crucial to the future development of therapeutics due to its ability to develop a blueprint of a person's DNA. Furthermore, there have been rumors of the two companies speaking ever since the talks between Illumina and Roche fell apart. In fact, according to some reports, Life Technologies and Roche were speaking even before the Illumina deal fell apart, back in February 2012 when the two companies signed PCR licenses.

According to recent reports, Life Technologies is looking for $65-$75 per share. Jefferies analyst Jon Wood said that the $50 to $60 range is more realistic in present market conditions. However, Wood must remember how close Roche came to acquiring Illumina last year, and the fact that Life Technologies is more valuable with patents and products that could be quite useful in the development of new age therapeutics.

At $65-$75 per share Roche would be acquiring Life for $11-$13 billion, roughly twice as much as the $6.7 billion bid that Roche made for Illumina last year. Last year, Roche pulled out of the Illumina deal due to concerns of flawed data. However, Roche then tried to pursue Illumina on several occasions for a lower price, indicating that it desperately wanted to have the DNA technology that such a company had to offer. Life Technologies is a larger and more diversified business, with more to offer in terms of patents, revenue, and products.

In some ways the deal would be similar in terms of value/fundamentals; as Life has 3.5 times more in sales, 4 times the EBITDA, and 2.5 times as much operating cash flow. However, Life also has 3 times as much debt. Overall, I think that with Life's much larger business, that stretches across 160 countries with over 4,000 patents, it's worth at least 70% more than the premium that Roche offered for Illumina. In short, Life Technologies is worth twice as much as Illumina because it's a much larger business that is more complete.

At this point, I am unable to find many reasons that this deal will not get done. Roche has proven with its relentless pursuit in the DNA space that it wants to complete a deal. In my opinion, the only risk is that talks will force Illumina to lower its asking price, or that Roche will determine that the price for Life Technologies is too high. Personally, I don't think the price is too high because of what Life Technologies brings to the table in terms of innovation, support, and development. However, I am not the one who is writing a $12 billion check.

The fact that other private equity firms may show interest should be enough to keep Roche bidding in the $11-$13 billion range. After all, Roche is a company with about $16 billion in net income over the last year, a company that could easily afford this acquisition. Not to mention, all the signs are present, and it's obvious that Roche wants to acquire a company of this caliber, in this industry. And for those analysts and investors who believe the price is too high, just remember that it's cheap if it leads to the development of the next Herceptin. This may ultimately mean that the benefits of Life Technologies span well beyond its $3.8 billion business. This is why Roche and Life are a good fit and is why Roche will continue to pursue the company in its quest to remain the largest company in cancer therapeutics.

Disclosure: I am long LIFE. 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.