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Cowen Downgrades Life Technologies Amid Acquisition Chatter

NEW YORK (GenomeWeb News) – Citing a recent run up in Life Technologies' stock fueled by speculation that it may be positioning itself to be bought, investment bank Cowen & Co. today downgraded the Carlsbad, Calif.-based firm to Neutral from Outperform.

Analyst Doug Schenkel added in a research note that amid reports that several potential buyers may be preparing to bid on Life Tech, "[w]e do believe there is a transaction to be done (at the right price)."

Schenkel noted that year-to-date shares of Life Tech have jumped more than 30 percent on reports that it had hired two investment banks, Deutsche Bank Securities and Moelis & Co, as part of a strategic review of its business. The company may be seeking a leveraged buyout by a private equity firm or an acquisition by a competitor, according to reports.

In downgrading Life Tech's shares, Schenkel said that while the company "still trades at a discount to peers, the relative discount is less than the historical five-year average." He added, "[W]e view shares as fairly valued."

Earlier this week, Reuters reported that Roche and a group of private equity firms, comprising KKR & Co. and Hellman & Friedman, have joined the list of potential bidders for Life Tech. That followed a report earlier in the month from Bloomberg, which reported that Blackstone Group, Carlyle Group, TPG Capital, and Temasek Holding had banded together to explore an acquisition of Life Tech.

In his note Schenkel said that any leveraged buyout is "unlikely" if Life Tech is seeking a purchase price above the low-to mid-60s per share. While a leveraged buyout at $62 per share could generate a low-to-mid teens return in the third or fourth year, "we see little upside to current levels in a [leveraged buyout] unless there was some breakup value that generated a higher price."

Meanwhile, competitors that have been mentioned as possible buyers include Agilent Technologies, Thermo Fisher Scientific, Danaher, and Becton Dickinson. The size of a Life Tech buy may be too much of a deterrent, however, to those firms, he said.

In addition, among the other firms rumored to be interested in Life Tech, "[o]nly Roche could potentially complete a deal at current levels with cash and equivalents on hand," Schenkel said. He noted, though, that Roche may not want all of Life Tech. While Roche could seek a purchase of the Ion Torrent business, Schenkel said that Ion Torrent and the Roche 454 platform have chemistry that "are quite similar." He added that Roche has a collaboration with DNA Electronics, which is developing a system "that sounds a lot like Ion."

Ion Torrent also still has not yet reached breakeven, which could dissuade a Roche-Ion Torrent deal.

While there has been some speculation that Life Tech may decide to sell only the Ion Torrent business, such a deal may not make sense, Schenkel said. That business accounted for almost half of Life Tech's revenue growth in 2011 and 2012, a trend that is expected to repeat in 2013.

"Put differently, Life Technologies does not appear to be a growth asset without Ion Torrent," Schenkel said.

Life Tech also continues to invest heavily in Ion Torrent, with about one-third of its total R&D budget of $350 million going to that business.

Life Tech's other businesses also rely heavily on the success of Ion Torrent, Schenkel said, and as much as one-third of Life Tech's current revenue "could eventually be at risk to replacement by next-generation sequencing."

"We are not saying there is not a transaction to be done," he wrote. "Life Technologies is a good asset which is likely to garner significant interest. However, we believe it is not likely that a deal will be done at levels that are materially higher than where Life is currently trading."

Life Tech's shares on the Nasdaq were down almost 2 percent in afternoon trading at $64.19.

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