CLSA Downgrades SanDisk, Sees 25% Chance Western Digital Deal Falls Apart

• The share price of SanDisk Corporation (NASDAQ: SNDK) has declined 13.97 percent over the past three months, down to $66.23 on January 21.
• CSLA’s Mark Heller has downgraded the rating on the company from Outperform to Underperform, while lowering the price target from $86 to $70.
• The downgrade is based on the weakening NAND fundamentals, as well as increased risk to the Western Digital Corp (NASDAQ: WDC) deal.

According to the CSLA report, “While we don’t think WD can walk away from the SanDisk deal due to weakening fundamentals, we’re more cautious on Unisplendour’s investment in WD given the pull back in WD’s share price.”

Analyst Mark Heller explained that in the absence of Unisplendour, the deal would need the approval of Western Digital’s shareholders, which might be difficult.

The widening gap between Western Digital’s offer price and SanDisk’s share price implies that shareholders are becoming increasingly cautious about the deal.

“However, our discussions with M&A attorneys following a review of the merger documents suggest that it will be very difficult for WD to walk away from the deal due to changes in the fundamental outlook of SanDisk and the broader NAND market,” Heller said.

Heller believes that neither reason represents adequate grounds to trigger a material adverse change that would be required to terminate the deal.

Meanwhile, SanDisk is expected to report in-line results for the December 2015 quarter on January 27, although Heller believes that there could be risk to the March 2016 quarter guidance, driven by weaker demand and pricing trends.

The EPS estimates for 2016 and 2017 have been reduced from $4.20 to $3.00 and from $5.00 to $3.15, respectively, to reflect expectations of declines in bit growth and ASPs.