Tuesday, April 10, 2012

Illumina (ILMN) - Hostile Bid Spurned Again; Third Parties Support Current Board; Risk Rising as Uncertainty Persists

ILMN is trading $52.33, down 0.6% with IV30™ up 5.1% as of ~10:20am EST. The LIVEVOL® Pro Summary is below.


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Illumina, Inc. (Illumina) is a developer and manufacturer of life science tools and integrated systems for the analysis of genetic variation and function. The Company provides a line of genetic analysis solutions, with products and services that serve a range of interconnected markets, including sequencing, genotyping, gene expression, and molecular diagnostics.

This is one of the most interesting vol stories out there right now, IMHO. The story starts with a hostile takeover bid… Then a re-upped bid… then a stand by the Board of Directors spurning even the second bid. Let’s start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink). Then we’ll go to the news.

On 1-25-2012, ILMN stock popped from $37.69 to $55.15 or 46.3% in a day. Here’s that news:

Roche Holdings Ltd. (Other OTC:RHHBY.PK - News) recently announced that it has placed a bid to acquire all the outstanding shares of Illumina Inc. Roche’s offer of $44.50 per share (aggregate value $5.7 billion) in cash represents a 64% premium over Illumina’s stock price on December 21, 2011.

On December 22, 2011, rumors in the market about a potential transaction between Roche and Illumina had pushed up Illumina’s stock price significantly.

We note that Roche had made multiple efforts in the past to strike a deal with Illumina, but the latter was unwilling to participate in substantive discussions. This led Roche to commence a tender offer to purchase Illumina’s outstanding shares.
Source: ZACKS via Yahoo! Finance -- Roche Aims for Illumina

Then on 1-26-2012:
U.S. gene sequencing company Illumina (ILMN.O) on Thursday unveiled a "poison pill" defense strategy against a hostile bid from Swiss drugmaker Roche (ROG.VX), saying it would trigger a rights agreement if any party bought 15 percent of its stock.

Basel-based Roche is offering $5.7 billion in cash for Illumina but the Californian group is resisting the unsolicited approach.
Source: Reuters via Yahoo! Finance -- Illumina unveils poison pill to stave off Roche

Then some board nominations by Roche… And four different letters sent directly to ILMN shareholders highlighting the growth prospects for the combined firm.

Not enough? Try these awesome headlines all within the last three weeks:

3-22-2012: Roche seen extending its Illumina offer once again Reuters

3-26-2012: Roche Extends Illumina Bid Again Zacks

3-29-2012: Roche Raises Illumina Bid to $51, Seeking Faster Deal at Bloomberg

3-29-2012: Roche may raise bid again if Illumina engaged: source at Reuters

3-29-2012: Analysts expect higher Roche bid for Illumina at MarketWatch

3-30-2012: For Illumina, Roche's Third Offer Not So Charming at Seeking Alpha

4-1-2012: Roche May Drop Its Offer for Illumina, Sonntags Zeitung Reports at Bloomberg

4-2-2012: Illumnia Rejects Roche’s Revised Offer of $51 a Share at Bloomberg

4-3-2012: Illumina to Shareholders: We Are Like Apple, Would You Sell Apple? at The Wall Street Journal

Then over the last two days:

4-9-2012: Illumina sends letter that recommends stockholders reject Roche's (RHHBY) offer and vote white proxy card. Provided by Briefing.com (www.briefing.com).

4-10-2012: Illumina: Proxy advisory firm Glass Lewis recommends stockholders vote for the election of all illumina nominees using management’s white proxy card. Provided by Briefing.com (www.briefing.com)

So, there you go – a wild ride. For more fun, ILMN has an earnings release due out either right near Apr expo, or early in May expo. Yeah, either one – unknown.

Let’s look more carefully at the IV30™ -- to highlight another trend. This chart is the same time horizon as the one above, but it looks only at the implied:

I’ve highlighted the recent move in IV30™, namely, up. Yeah, risk is rising. Note that the implied may well be on a path back to the original value before the takeover bid… and maybe even higher.

Let’s turn to the Skew Tab.

Most notably, we can see the front month is elevated to the back, and quite substantially at some points. The last two earnings releases in calendar Q2 for ILMN have been 4-28-2010 and 4-26-2011. It’s a reasonable bet that the next earnings release will in fact be inside May expiry and outside Apr. And now we have an even more compelling term structure comp between Apr and May.

News is coming – one way or the other on this bid / spurn dance. The question, is it coming out before Apr expo, or is there a larger announcement due out in the earnings release. Will the company (ILMN) disclose some extraordinarily rosy “stuff” in the next earnings release intended not so much for outsiders, but for current shareholders? -- You know, a compelling argument for a higher valuation – well above the bid(s)…

Finally, let’s turn to the Options Tab, for completeness.

I wrote about this one for TheStreet.com (OptionProfits), so no specific trade analysis here. Across the top we can see that Apr is priced to 58.20%, while May is priced to 50.32%, even though earnings are likely in the Mat expiry (but not in Apr). Just to throw another possibility out there, what if another company bids for ILMN – or even more interesting, if ILMN approaches another company and therefore solicits a bid?

Also, ILMN may be dangerously close to breaching its fiduciary responsibility by refusing to meet with Roche. Couldn’t a shareholder complain that at least a meeting is in place? How about two, or three, or four?.. Careful, that makes a “class,” as in “class-action” lawsuit.

The equity market has ILMN priced over the second bid ($51), but what is fair value if the bid disappears? Or if a class of shareholders demand meetings? Or.. if earnings are bad? All in all, this is incredibly interesting, but in the same vein, incredibly risky.

This is trade analysis, not a recommendation.

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