Wednesday, May 9, 2012

Called it (Affymetrix-eBioscience)!

There's not much less interesting to read on a blog than a blogger giving themselves a pat on the back, but abandoning caution, here's mention that what I predicted would happen between Affymetrix and eBiosciences has come to pass, as AFFX and eBio have adjusted the purchase price downward in order to get their merger financed.

I predicted two months ago that their stalled merger would go forward with eBiosciences lowering the price slightly. Lenders financing the deal saw AFFX's performance slip enough in 2011 to make them wonder if the deal was dangerous. I stated that both AFFX and eBio lacked better alternative than a slightly lower price.

The previous deal - valuing eBio at $330M has been redone at $315M. A 5% price reduction doesn't seem like much (and indeed it won't bother eBio shareholders much), but annual debt service on the "extra" $15M for AFFX probably would equate to an additional annual interest expense of $1M. With $1M more cash flow at the $315M price, the lenders can sleep better.

I like the new deal, and so does the market -AFFX is up ~10% since the announcement, effectively meaning that AFFX added ~$45M in value ($15M price reduction, plus ~$30M in increased market cap.)

Based on the AFFX press release, pro forma 2011 for the combination of AFFX and eBio might look like this:

Revenue: $338M
EBITDA: ~$5M (swinging to a positive)

Make no mistake, AFFX wants/wanted eBioscience to pave over their declining genomics business. The deal extends the period for AFFX to turn this business around (I still think there's plenty of life left in Affy genomics hardware & consumables), and if so, multiples expansion (sales or EBITDA) will lift the stock substantially. Still, I predict that AFFX in a few years will be known more for their consumables business than their genomics business, and that's probably a good thing.

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