Pacific Crest Downgrades Sandisk On Pending Merger, Is Buying Western Digital

Pacific Crest’s Monika Garg downgraded the rating for SanDisk Corporation (NASDAQ: SNDK) to Sector Weight, citing the impending merger with Western Digital Corp (NASDAQ: WDC). The deal is now to be financed by $67.50 in cash and 0.2387 Western Digital shares, which translates to around $78 on Friday’s Western Digital close price of $43.89.

SanDisk’s shares are trading within 9 percent of this value, which calls for the downgrade, analyst Monika Garg said. She added that if the deal were to fall through, SanDisk’s shares would trade towards the mid-$50s, which is the level at which they trader prior to the deal being announced.

“We are buyers of WDC. Western Digital has $14.40 per share in cash, and excluding cash, is trading at 4.4x our F2017 EPS estimate; whereas, STX trades at 8.7x our F2017 EPS estimate and has net debt of $9.50 per share,” Garg wrote. Moreover, Western Digital has better gross margins than Seagate Technology PLC (NASDAQ: STX).

The analyst said that the SanDisk deal makes strategic sense for both the companies and expects the combined entity to generate more than $9.50 in F2017 EPS, generate more than $3 billion in cash flows and close to $% billion in EBITDA.