Jefferies & Co. Downgrades ADC Telecom to Hold from Buy (ADCT)

Jefferies & Co. is out with a research report this morning, where it downgrades shares of ADC Telecom (NASDAQ: ADCT) to Hold from Buy; it also adjusted its price target to $12.75, from $10.50.

The Jefferies analysts said, “The run up in ADC's stock price following the announcement of its acquisition by Tyco Electronics leaves little room for further upside. We are changing our rating to a Hold on Tuesday’s announcement that Tyco Electronics will acquire ADC Telecom for $12.75 per share.”

They added, “ADC is being acquired by Tyco Electronics for $12.75 per share and an EV of approximately $1.25 billion. The purchase price is a 44% premium to Monday's closing price of $8.85. Tyco plans to finance 80% of the all cash deal using existing cash and the remaining 20% with debt. The deal is expected to be accretive to earnings by $0.14 in the first year following the close of the deal, expected sometime in Tyco's fiscal Q1 (calendar Q4'10). ADC's business is expected to contribute operating margins of 15% in the third year following the close of the deal (ADC operating margins were 6.6% in fiscal Q2'10).”

They also noted, “This deal is driven by strategic positioning and cost synergies. Tyco believes the two companies' product portfolios and differing regional focuses complement each other nicely. ADC's strength in data center, switching center, and fiber products goes hand-in-hand with Tyco's strength in outside plant products. Tyco believes the combination enables it to offer a more complete product suite better positioned to exploit the deluge of consumer data consumption coming from smart phones, 3D televisions and video-conferencing.”

“For example, ADC's DAS products will expand Tyco's wireless connectivity offerings. Geographically, ADC's strength in North America and APAC complements Tyco's strength in Europe and India. On the cost side, Tyco sees $100 million in total cost synergies (50% in first year), two-thirds of which would come in the form of opex reductions, and the rest from manufacturing efficiencies. The organization expects $110-$130 million in expected restructuring charges associated with the deal (75% in first year).”

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