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Thermo Fisher Scientific Inc. (TMO), Life Technologies Corp. (LIFE), Illumina, Inc. (ILMN): This Deal Brings Benefits Along With a Huge Debt

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The rumors have finally been put to rest. After three months of a bidding war, Thermo Fisher Scientific Inc. (NYSE:TMO) ultimately beat other contenders to acquire Life Technologies Corp. (NASDAQ:LIFE) for $76 per share, or approximately $13.6 billion (plus net debt at close).

This transaction, expected to be completed in 2014, is expected to propel the growth of Thermo Fisher in the area of genetic analysis and molecular diagnostics. For a company that makes products to help with scientific research and healthcare, being able to create products that aid genetic analysis would be one of the most empowering things to provide to their customers. Let’s take a deeper look into the value and implications of the deal.

The deal

After months of speculation, Life Technologies Corp. (NASDAQ:LIFE) accepted Thermo Fisher Scientific Inc. (NYSE:TMO)’s bid over an offer from Sigma-Aldrich Corporation (NASDAQ:SIAL) and a $65 per share bid from a consortium including Blackstone, Carlyle, KKR, and Temasek Holdings. The price of $13.6 billion was a surprise to many analysts that were expecting bids in the range of $11 billion.

Life Technologies comes with 5,000 patents, a revenue CAGR of 17%, and EBITDA CAGR of 19% over the last 10 years. Its products include reagents and consumables as well as instruments and systems, but the main attraction is its recent investment in next-generation genetic-sequencing technology.

Thermo Fisher Scientific Inc. (NYSE:TMO)Its Ion Torrent technology is a game changer that has dramatically cut down the time and cost of sequencing human DNA, a major boon to researchers and drug makers developing gene-based diagnostic tests and treatments. This technology can complete the sequencing process, which normally would take several days, in a couple of hours and for about $500.

On its recent earnings call, Thermo Fisher Scientific Inc. (NYSE:TMO) mentioned that genetic testing was an important field going forward and wanted to get into it as an industry leader. There are a number of experimental technologies, but if the company wanted to succeed and needed something more functional, it would need either Illumina, Inc. (NASDAQ:ILMN) or Life Technologies’ Ion Torrent business. And this is exactly what it did, acquired Life Technologies Corp. (NASDAQ:LIFE), which is considered a notch behind Illumina in the race to produce faster and less expensive gene sequencing technology.

Numbers

Thermo Fisher acquired Life Technologies for $76 per share or $13.6 billion in cash. The payment is expected to be in cash and debt of $9.5 billion to $10 billion and equity of up to $4 billion. Further, Thermo Fisher will take over Life Technologies’ $2.2 billion debt.

Both companies sell their products to the same customers, which creates opportunities for cost and revenue synergies. Thermo Fisher Scientific Inc. (NYSE:TMO) expects the deal to add $0.90 to $1 to its EPS in the first full year and targets $275 million in operating income synergies, composed of $250 million cost synergies and $25 million revenue synergies by the third year.

30% of the cost savings would come from eliminating public company expenses, and the balance will be the benefit of combined business scales and consolidation of facilities and functions. On the revenue side, it expects to benefit from existing customers by leveraging the combined product line and using Life Technologies Corp. (NASDAQ:LIFE)’ strong e-commerce platform (it transacts over half of its orders through its e-commerce business).

Further, the combination will also help it to gain a strong foothold in Asia-Pacific, especially China, thereby tapping the increasing demand in life sciences and healthcare.

The combined company will have pro-forma revenue of more than $16 billion. Life Technologies has 85% recurring revenue (consisting of consumables and service) and this will add about 6% to Thermo Fisher Scientific Inc. (NYSE:TMO)’s existing consumables mix, thereby expanding its share of recurring revenue.

From a ROIC perspective, Thermo Fisher currently generates low 9% range but expects it to step-down to mid 7% in the first year of the acquisition and thereafter rises up to 8.5% by the fourth year from the acquisition. Previously, Thermo Fisher had guided for 4% to 6% organic growth, but acknowledged on the conference call that Life Technologies is growing at a slower rate and expects it to grow organically by 3% on an average going forward.

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