Analysts at Canaccord Genuity (TSX:CF, LSE:CF) have reiterated their ‘Buy’ rating and $300 price target for Illumina Inc (NASDAQ:ILMN) after activist investor Carl Icahn said he is preparing a proxy fight at the gene sequencing company after its acquisition of Grail Inc wiped $50 billion of value from its market capitalization.
In an open letter to shareholders published Monday, and first reported by the Wall Street Journal, Icahn announced his intention to nominate three directors to Illumina’s board at its upcoming annual shareholders' meeting to weigh in on the decision to oppose a European Commission (EC) order to unwind the August 2021 takeover of Grail, a cancer-detection test maker. Illumina had failed to first secure regulatory approval for the deal, which was blocked on competition concerns.
“It is challenging to predict the outcome of a proxy fight, but if there is one here, we are relatively confident that investors would view the event as a net positive as it could increase the probability that GRAIL is divested in the near term and the process is not further drawn out,” the Canaccord analyst said in a client note.
“We remain supportive of GRAIL and its mission, although it is clear to us that investors have a negative opinion of Illumina's combination with the company. We continue to believe ILMN shares will likely rise as its separation from GRAIL becomes more likely or closer to fruition (a key reason to focus on the stock and own the shares in the near term).”
Specifically, per the report, the analysts noted that Icahn's board nominees include Vincent Intrieri, Jesse Lynn and Andrew Teno — three men with ties to Icahn in varying capacities. Additionally, they noted that Icahn reportedly asserts that Illumina “overpaid” for Grail (roughly $8 billion valuation in September 2020), especially considering the early-stage company had never generated revenue.
Aggressive stance
“Overall, according to the WSJ, Mr Icahn asserts ILMN ‘cost its shareholders roughly $50 billion’ by closing its merger with Grail before full regulatory approvals were achieved,” the analysts wrote. “In our view, this is an aggressive stance. To remain unbiased, we note Illumina has lowered the fair value of its Grail asset, which generated essentially no revenue prior to the June 2021 launch of its Galleri multi-cancer early detection (MCED) test. That said, the claims appear a touch aggressive, albeit not uncommon for an activist campaign.”
The analysts said Illumina expects the EC will issue a divestiture order in the second quarter of 2023. If or when the EC issues this order, they noted that Illumina has stated it will be prepared to cooperate with the Commission and pursue a divestiture under the specifications outlined — as well as request a stay on the order and/or appeal.
“Additionally, we also note ILMN expects to participate in a jurisdictional trial challenging the EC challenge,” the analysts said. “Either way, the full process could last well into 2024 under this timeline, although activists such as Mr Icahn could help accelerate the process, as a more significant board presence could influence decisions made by Illumina (from a broad perspective, not solely with respect to the Grail merger).”
Illumina’s shares were 0.3% down at $226.48 in afternoon trade in New York.
Contact the author at stephen.gunnion@proactiveinvestors.com