Failed Merger Could Push SanDisk-Western Digital Down 25%

Citi’s Stanley Kovler downgraded the rating for SanDisk Corporation SNDK from Buy to Neutral, while raising the price target from $76.60 to $77.50. The rating for Western Digital Corp WDC has been maintained at Buy, with a price target of $53.

SanDisk’s shares are approaching Western Digital’s takeout price of around $79 per share. With this, there is upside of merely 3 percent from current levels, and “we believe our thesis regarding WDC’s ability to complete its merger with Sandisk has largely played out,” analyst Stanley Kovler said.

Raising Estimates

Kovler expects shareholders of both the companies to “by and large” approve the merger.

The pro-forma EPS estimates for the combined entity for CY16, CY17 and CY18 have been raised from $5.66 to $6.10, from $7.01 to $7.47 and from $8.69 to $9.72, respectively. The upward revision mainly reflects slightly higher synergies and much lower interest expense than was previously expected, offset partially by a higher estimated tax rate.

Cost Of Deal Failure

The analyst believes that in case the merger is not completed, Western Digital’s shares could slide to $36, while SanDisk’s shares could dive to $45, “assuming resumption of dividend payments and share buybacks.”