Jefferies: Avago-Broadcom = $14 Of 'EPS Power'

In a report published Friday, Jefferies analyst Mark Lipacis upgraded the rating on Avago Technologies Ltd. AVGO from Hold to Buy, while raising the price target from $125 to $179. Avago has announced its intention to acquire Broadcom Corporation BRCM for $3.7 billion in a cash and stock deal, expected to close by 1Q16. "The proposed transaction would create the third largest semiconductor company in our coverage universe with $17 billion in annual revenues and $6 billion in annual net income, positioning it as a leading supplier in both Smart phones and Data Center infrastructure," analyst Mark Lipacis mentioned. Lipacis said that there is no overlap between the product portfolios of Avago and Broadcom and thus it is likely to get the necessary regulatory approval. "Our M&A framework shows that AVGO investors win 2x as AVGO both lowers BRCM's costs and gets a higher multiple on the higher earnings," the report added. Lipacis expects the merged entity to have an EPS of over $14 in 2017, assuming opex synergies of 8 percent. "We estimate that AVGO+BRCM would have $6 billion of annual FCF, which we think positions the company as a potential capital return play," Lipacis said. Avago reported better-than-expected non-GAAP EPS of $2.09 for the January quarter. The company's April quarter sales guidance of $1.6 billion and implied EPS Of $1.93 are above consensus expectations.