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Broadcom-Avago Merger Could Boost EPS 5% To 11%

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In a report published Thursday, UBS analyst Stephen Chin maintained a Buy rating on Avago Technologies Ltd (NASDAQ: AVGO), with a price target of $138, saying that the potential deal with Broadcom Corporation (NASDAQ: BRCM) could be accretive for the company.

According to The Wall Street Journal, Avago is in talks to acquire Broadcom. Although there is no confirmation about such a deal, the key positives for Avago include:

  • EPS accretion by up to 11 percent in the next calendar year
  • Sales synergies from complementary products in Wireless (Avago RF filters, power amps vs Broadcom connectivity) and Networking (ASICs, fibre optics vs switching and small cell chipsets, optical PHY components)
  • Expansion of scale that could result in reduced wafer costs/COGS and SG&A
  • Adds valuable networking and wireless IP as well as CMOS logic capabilities for future RF front end modules (FEM)

Such an acquisition could be accretive to Avago's EPS by 5 percent to 11 percent, depending on:

  • Cost synergies that the companies can achieve
  • Mix of stock, debt and cash on hand, which is used to finance the potential purchase

UBS analyst Stephen Chin wrote, "Our base case assumes a $60/share acquisition price, cost synergies of $500m, debt of $8B and stock of $30B. We also look for the possibility that Broadcom's large offshore cash balance could be freed up as Avago is incorporated in Singapore."

In the report UBS noted, "We estimate minimal product overlap if Avago acquires Broadcom; we estimate Avago's exposure to PC HDD could decline from c.15% to 7-9% as only a small portion of Broadcom's connectivity sales are into PCs. We believe Broadcom's high market share in broadband and connectivity could enable higher penetration for Avago's power amp and optical products, while Broadcom's CMOS logic and SoC capabilities could create opportunities for Avago's wireless RF and wired infrastructure businesses."

Latest Ratings for AVGO

Dec 2016Loop CapitalInitiates Coverage OnBuy
Nov 2016Pacific CrestMaintainsOverweight
Oct 2016Wells FargoInitiates Coverage onMarket Perform

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Posted-In: Analyst Color Reiteration Analyst Ratings


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