23 Mar 2016
Acquisition price rated 'fair' by Longbow Research while activist investor SilverArrow sees potential for higher valuation.
The equities analyst company Longbow Research has declared the price of the proposed acquisition of Rofin-Sinar by fellow laser firm Coherent as “respectable”, and expects it to be approved by Rofin’s shareholders.
In a research note published shortly after the deal was announced, Longbow's Joe Wittine wrote that the $816 million enterprise value of Rofin implied by the $32.50-per-share cash proposal equated to around eleven times the firm’s anticipated earnings before interest, tax, depreciation and amortization (EBITDA) of $70 million in the current fiscal year.
That compares with the ten-times-trailing-EBITDA figure for which another laser firm, Newport, is set to be acquired by MKS Instruments, Wittine added.
Whether Rofin’s most vocal and critical of shareholders – the activist investor SilverArrow – ultimately backs the deal is unclear at this stage. Shortly after Coherent announced the deal, SilverArrow CEO Thomas Limberger declared himself “gratified” with what he sees as SilverArrow’s advocacy efforts resulting in a substantial return for investors, but added that its internal valuation of Rofin was higher.
At $32.50 per share, the agreed purchase price represented a 40 per cent premium on Rofin’s stock immediately before the acquisition was announced, and the last time Rofin’s valuation on the Nasdaq exchange was in excess of that was way back in July 2011 (see graphic above).
However, the industrial laser firm did trade at close to $30 for a period in early 2015, not long after SilverArrow bought its stake in Rofin.
Since then, SilverArrow has been at loggerheads with the Rofin board, something that had been due to culminate at the company’s annual shareholder meeting last week with each party backing three different nominees for election to serve on the board of directors in the future.
But thanks to the Coherent deal that meeting and the election were postponed, with Longbow’s Wittine noting that a conference call to discuss the acquisition plan appeared hastily arranged, and without Rofin management present.
“From Rofin’s point of view, the long-tenured board opted to cash-in instead of risk [the] shareholder vote on a potential shakeup,” wrote the analyst in his research note. He added:
“The eleventh-hour timing is curious, since we thought only one of SilverArrow's three candidates would receive approval. Perhaps the board was not as confident. [The] timing of the announcement obviously suggests [Coherent] held the leverage, though the price is fair.”
Rival Chinese bid unlikely
Whether or not SilverArrow accepts the Coherent proposal remains to be seen, but in his initial reaction to the deal, Limberger said that the investor’s internal analysis supported a higher valuation, of around $40 per share.
The SilverArrow chief added: “We are reviewing whether the Rofin board’s acceptance of Coherent’s bid was influenced by pressure to sell the company in light of the eventual addition of SilverArrow directors to the board.”
SilverArrow also looks to be attempting to drum up support for alternative buyers to examine the Rofin acquisition, in the hope that a rival bid might push up the stock valuation and in turn its own profit on an eventual sale.
However, Wittine says that it is tough to see any other obvious candidates making a bid. And while there is always the possibility that a Chinese laser company might be interested, with Rofin listed in the US such a deal would first have to be examined by the Committee on Foreign Investment in the US (CFIUS).
But with CFIUS recently nixing similar acquisitions, including the planned buy-out of Philips’ LED and automotive lighting divisions by a Chinese-led private equity group, that looks unlikely – particularly in light of the fact that Rofin subsidiary Nufern has worked closely with the US military on the development of directed-energy weapons.
IPG still way out in front
If Wittine is correct and no other Rofin suitors emerge, Limberger and SilverArrow may simply decide to sell up at a reasonable profit and move on to their next target.
The Longbow analyst also mused that while the proposed deal will greatly expand Coherent’s exposure to the materials processing sector, including the industry’s number-two high-power fiber laser business, the principal intention behind the move could be to acquire Rofin’s larger customer list. That includes the likes of German sheet-metalworking firm LVD, and China’s Unity Prima.
What the deal is unlikely to do much to change is IPG Photonics’ continued domination of the high-power fiber laser sector. Although Rofin ranks second in that market, it is a very distant second to IPG and the proposed acquisition did not appear to move the needle on IPG's current $5 billion market capitalization.
Wittine ranks Coherent’s existing high-power fiber laser business in fifth place, behind Lumentum in third and at a similar level to fourth-ranked nLight.