Cowen Bullish on Broadcom's (AVGO) Acquisition of Brocade (BRCD); Sees Street Ests as 'Way Too Low'
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Cowen and Company affirms Broadcom (Nasdaq: AVGO) with an Outperform rating and $205 price target following news that the company is acquiring Brocade.
Analyst Tim Arcuri commented today,
In the context of a frothy M&A environment for semiconductor assets, this is a great deal and we see it as an inexpensive (~4.5x effective EV/EBITDA post IP networking divestiture) way to buy more FCF for Broadcom to increase capital return and help fuel a better stock multiple. The long-awaited increase in LT financial model also further validates that Street numbers in C2017/2018 remain way too low.
Arcuri also offered the following notes:
- Financial: Consistent w/our thinking, the deal is ~14% accretive (non GAAP, ex SBC) to EPS in C2018 inclusive of significant synergies (e.g. FC SAN opex is assumed to be only ~20% of revenue - reasonable to support a business that is in secular decline (AVGO is suggesting it is more flattish)). We have shown an extensive pro-forma analysis in this note (SEE CHARTS/TABLES). The storage market is clearly moving away from fibre channel, but this decline will be slow and this deal, with relatively little incremental leverage, is an inexpensive way to buy more FCF for AVGO to increase capital return.
- Strategic: Strategically, the FC SAN business is a duopoly (BRCD ~70% share) with CSCO, but this is a very small business for CSCO and sales channels are different so it is doubtful AVGO would lose any merchant silicon business from CSCO as a result of this deal. Separately, we do believe CSCO is, at a high level, trying to prioritize internal silicon more going forward (Jericho 2 chipset ASPs are ~$35k versus ~$3.5-4k for Tomahawk 3.2Tb) but this will be challenging and unrelated to this deal.
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