Life Takeover at Lowest Valuation Beats No Deal: Real M&A

A takeover of Life Technologies Corp. at one of the lowest multiples on record would still be better for shareholders than no deal at all.

The $10.7 billion life-sciences company has drawn interest from a buyout group, which includes Blackstone Group LP and Carlyle Group LP, as well as competitors, people with knowledge of the matter said last week. Life should sell for at least $65 a share, said Robert W. Baird & Co. While that price would imply the industry’s second-lowest deal valuation on record, it still tops analysts’ $53.24 average estimate for Life’s stock as a standalone company, according to data compiled by Bloomberg.

Life began exploring a sale last year and has traded for a discount to its peers as investors question the growth prospects for its gene-sequencing business, which makes technology used to provide a blueprint of a person’s DNA. The company also sells products that scientists use in labs for cancer and stem cell research. While private-equity suitors may not be able to justify a price higher than $65 a share, another health-care company such as Thermo Fisher Scientific Inc. could pay up to about $70, International Strategy & Investment Group LLC said.

“Life’s stock has underperformed, so something needs to be done to unlock the value,” Ross Muken, a New York-based analyst with ISI, said in a telephone interview. “If they don’t think they can fix the sequencing business, then a deal would be viewed as being fairly attractive. Without all of this, the stock would be in the low to mid $50s right now.”

Suzanne Hatcher, a spokeswoman for Life, declined to comment on specific bidders or prices.

Weighing Options

Life, based in Carlsbad, California, began exploring its options last year when the stock price was in the low $40 range, Chief Executive Officer Gregory Lucier told analysts last month. Life said in January that it had hired Deutsche Bank AG and Moelis & Co. to assist in the process.

The decision to weigh a sale came as Life’s valuation trailed its peers. The shares, which have jumped more than 14 percent in two months on takeover bets, still trade for 14 times this year’s estimated earnings, lower than almost 90 percent of life-science equipment makers larger than $5 billion, data compiled by Bloomberg show. The median price-earnings ratio is 18, and Life’s closest rival Illumina Inc. fetches 33 times earnings, the data show.

“Life trades at a discount on most valuation multiples,” Dan Leonard, a New York-based analyst for Leerink Swann LLC, said in a phone interview. “There is uncertainty in the investment community about the growth rate of the company.”

Slower Growth

Life and Illumina make machines that provide a full transcript of a person’s DNA, which can be used to diagnose rare diseases, identify the risk for a genetic condition, or match cancer treatments to patients’ tumors.

Life has boosted sales by just 5.1 percent on average in each of the last three years versus a 20 percent increase at San Diego-based Illumina, data compiled by Bloomberg show.

Since Life’s SOLiD gene sequencers failed to outsell competing products, investors now have doubts about its next-generation technology called Ion Torrent, a desktop-sized machine designed to be less expensive and simpler to use. Life gained the technology in its $375 million purchase of Ion Torrent Systems Inc. in 2010.

SOLiD “left a bad taste in investors’ mouths,” Jonathan Groberg, a New York-based analyst with Macquarie Group Ltd., said in a phone interview. “Now there’s a little bit of a disconnect between investor sentiment and the reality of the business itself.”

‘Doable’ Deal

That’s giving buyers the chance to get a maker of brands that are well-known by scientists on the cheap, according to Jeff Elliott, an analyst with Baird in Chicago. He said the company could get between $65 and $70 a share in a takeover, compared with $62.88 yesterday.

Today, Life shares fell 0.9 percent to $62.31.

“That is very doable,” Elliott said in a phone interview. “Life has some very attractive franchises. They are a leader in sequencing. It has nice, long-term growth potential. At $65, it’s a home run.”

At that price, a buyer would be getting Life for just 11 times earnings before interest, taxes, depreciation and amortization -- the second-lowest multiple ever paid in a life-sciences deal worth $5 billion or more, data compiled by Bloomberg show. Only Beckman Coulter Inc. was bought for a cheaper valuation at 8.7 times Ebitda, the data show.

Private-equity suitors also would get a company that throws off more free cash relative to its stock price than more than half of its competitors, the data show.

Predictable Cash

“That’s what private-equity companies tend to look for -- very predictable cash flows,” Leerink’s Leonard said.

A buyout group comprising Blackstone, Carlyle, TPG Capital and Temasek Holdings Pte is exploring an offer for Life, people with knowledge of the matter told Bloomberg News last week. While it’s attracted interest from some so-called strategic suitors, Lucier, the CEO, favors a buyout because he wants to keep the reins, said two of the people, who asked not to be named because the negotiations are private.

KKR & Co. also is considering teaming up with other private-equity firms to make a bid, said people familiar with the matter. Thermo Fisher, the world’s second-largest maker of health-care equipment, and Danaher Corp. have also considered making bids for the company, said one of these people.

Return Requirements

Representatives for all of the private-equity firms declined to comment. Ron O’Brien, a spokesman for Waltham, Massachusetts-based Thermo Fisher, and Matt McGrew of Washington-based Danaher also wouldn’t comment on the companies’ potential interest in Life.

While private-equity firms can’t be too aggressive in terms of price because of their internal rate of return requirements, an industry suitor like Thermo Fisher could pay in the high $60s to low $70s, said ISI’s Muken.

Thermo Fisher sells laboratory tools such as glass microscope slides and beakers to many of the same customers as Life. Acquiring Life would “create huge cost synergies over a number of years” and “an unparalleled company in the life-sciences space,” Macquarie’s Groberg said.

Groberg said Life’s biggest shareholders may balk at any bids below $70 a share because they know it’s a “very sticky, high-margin business” and that another leadership team may be able to better execute on Life’s goals.

Still, buying Life at $65 wouldn’t just be attractive for the acquirer. It’s more than shareholders would get if Life were to remain a standalone company.

Private Appeal

Before the deal talks were reported in January, analysts had been projecting that on average the stock would climb to just $53.24 in the next 12 months, estimates compiled by Bloomberg show. A bid of $65 or more would represent at least a 26 percent premium to Life’s 20-day average stock price prior to reports of the deal discussions.

Going private also would give Lucier a chance to invest more heavily in the sequencing business without worrying about quarterly earnings and to accelerate the transition into diagnostics, said Baird’s Elliott.

“They’re investing a lot of money in sequencing and that has been a dilutive business,” he said. “It’s the right move in the longer term, but in the short term it’s a drag on earnings. Taking the company private would allow you to accelerate that push without scrutiny from the market.”