Pacific Crest Downgrades Sandisk On Pending Merger, Is Buying Western Digital

Pacific Crest’s Monika Garg downgraded the rating for SanDisk Corporation SNDK to Sector Weight, citing the impending merger with Western Digital Corp WDC. The deal is now to be financed by $67.50 in cash and 0.2387 Western Digital shares, which translates to around $78 on Friday’s Western Digital close price of $43.89.

SanDisk’s shares are trading within 9 percent of this value, which calls for the downgrade, analyst Monika Garg said. She added that if the deal were to fall through, SanDisk’s shares would trade towards the mid-$50s, which is the level at which they trader prior to the deal being announced.

“We are buyers of WDC. Western Digital has $14.40 per share in cash, and excluding cash, is trading at 4.4x our F2017 EPS estimate; whereas, STX trades at 8.7x our F2017 EPS estimate and has net debt of $9.50 per share,” Garg wrote. Moreover, Western Digital has better gross margins than Seagate Technology PLC STX.

The analyst said that the SanDisk deal makes strategic sense for both the companies and expects the combined entity to generate more than $9.50 in F2017 EPS, generate more than $3 billion in cash flows and close to $% billion in EBITDA.