Roche is Back as Expected

Updated at 11:00AM, 12/20/12.

Shares of Illumina (ILMN) climbed 7% in the pre-market on news that Roche (RHHBY) may have revised higher its previous buy-out offer. The industry is well-aware that Illumina is open to selling the business, and Roche has certainly expressed interest as a buyer in the past. Earlier this year, Roche approached Illumina with a $44.50 per share bid price, which was then revised to $51 before the parties left off discussions when Illumina rejected the higher offer. But a Swiss newspaper on Thursday said a source has indicated that Roche and Illumina have agreed to a $66 price, a 27% premium to ILMN’s previous $52.17 close, and a bid that would make the total agreement worth $8.14 billion, and $7.6B on an E/V basis. The source said that the deal may be announced in the first half of January.

Report leaks on take over speculation not uncommon before an actual deal. Press leaks prior to Roche acquisitions have occurred in the past, and slipping impactful news ahead of official release allows pharmaceutical companies to prepare shareholders for an acquisition. A higher price for ILMN ahead of the official announced bid also makes the premium look less dramatic. Roche has been vocal about its interest in acquiring a gene sequencing firm, and Illumina of its interest in being purchased. In our previous coverage we noted the possibility for a revised bid in the $60 range, and although unconfirmed, evidence continues to point in the right direction. Investors willing to speculate on the deal could realize an 18% return based on ILMN’s share price before the bell on Thursday.

Roche has already foreshadowed that a large deal could be coming. Importantly, Roche executives at a meeting with investors noted that the company, “favors acquisitions of as much as $7 billion over spending cash on share buybacks.” Notably, a $66 per share bid for ILMN, in fact, calculates to an enterprise value of about $7.6 billion (factors in approximately $500 million in net cash).

ILMN’s bid for GNOM interesting, but Roche offer, if made official, will take precedence. Illumina is embroiled in its own take-over campaign. The company made a tender offer to acquire Complete Genomics (GNOM) last month, butting up against China-based rival and one of its own major customers, BGI-Shenzhen, which made a slightly lower offer ahead of Illumina’s. Illumina topped BGI’s $3.15 per share purchase price with a $3.30 offer, but GNOM’s board has indicated an unwillingness to accept the higher bid. Read more about that story here, and see why we think there’s a possibility for upsidebased on the circumstances.