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12:00 AM
Jun 16, 2008
 |  BioCentury  |  Finance

Ebb & Flow

Invitrogen needs uplift

By Stacy Lawrence Senior Writer

Despite the prospect of creating a mammoth provider of reagents and systems via the acquisition of Applied Biosystems (NYSE:ABI), investors in Invitrogen (NASDAQ:IVGN) seemed uncertain about how the company would fare post-deal. They pushed the acquirer's shares down $4.62 (11%) to $38.73 on Thursday when the news was announced and the stock ended off $6.41 (14%) for the week at $38.25.

Invitrogen will pay $38 per share, or about $6.7 billion, for ABI, which sells life sciences instrument-based systems, consumables, software, molecular diagnostics and services. The price is a 17% premium to ABI's close of $32.44 on Wednesday, the day before the deal was announced.

But the price is conditional on the 20-day volume-weighted average Invitrogen share price just prior to the close of the transaction falling within or above $43.69-$46. The companies didn't say what would happen if Invitrogen's price falls below that range.

Payment is expected to be 45% cash and 55% stock. Of the $3 billion in cash, about $2 billion will come from a new debt financing underwritten by Bank of America, UBS and Morgan Stanley. At March 31, Invitrogen had $549 million in cash, while ABI had $364.7 million.

The new debt will carry a 7% interest rate. In total, the newco will have $3.5 billion in debt, or 3.6 times debt to EBITDA, with a blended interest rate of about 6%.

ABI reported $2.1 billion in sales in FY07 ended June 30, 2007 and Invitrogen had $1.3 billion in sales for the year ended Dec. 31.

On a conference call, Invitrogen SVP and CFO David Hoffmeister said the combined company would have $800 million in operating cash flow and expects to start paying down the debt almost immediately.

Invitrogen shareholders will own the majority of the newco, which will be named Applied Biosystems. Invitrogen Chairman and CEO Gregory Lucier and ABI President and COO Mark Stevenson will retain their titles.

The combined company expects to save about $60 million in the first year, with a total of $175 million in cost savings expected in the first three years. For FY09, the companies are forecasting organic revenue growth in the mid-single digits, which is in line with the guidance Invitrogen gave in its 1Q earnings.

EPS at the newco is expected to be "neutral to slightly accretive" to the $2.60 Street EPS estimate for Invitrogen in FY09. In 2010 and beyond, Hoffmeister said he expects double-digit EPS growth.

Integration risk

Evan McCulloch of Franklin Templeton suspects the selloff of Invitrogen shares reflects investor concerns about the integration of the two companies. In 2000, Invitrogen made a $1.9 billion acquisition of Life Technologies, which took several years to digest and caused the acquirer to reorganize.

MPM's Kurt von Emster agreed investors are probably concerned that the acquisition will be a distraction to management, characterizing the selling as a "nervous reaction to this one because of the size and energy it would take for two companies to combine that are not co-located."

von Emster added that the price decline probably also is linked to worries that organic growth will be slower than previous guidance. On the other hand, he noted the deal gets Invitrogen into molecular diagnostics.

Moelis & Co. and UBS advised Invitrogen, and...

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