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Aug 19, 2016

S3 BLACKLIGHT: Thermo Fisher Short Interest Rises Prior to Illumina Deal Announcement

Short interest in clinical diagnostic equipment manufacturer Thermo Fisher Scientific Inc. (TMO US) rose $336 million, or 46% since August 12th, prior to TMO’s August 18th announcement that they are looking to acquire molecular diagnostic systems manufacturer Illumina Inc. (ILMN US) for $30 billion in a stock for stock deal. TMO’s stock price is down 1.2% since the announcement and down 4.2% from its August 1st year to date high.

The proposed deal may have to clear regulatory and anti-trust hurdles due to Illumina’s near monopoly in high-throughput gene sequencing and Thermo Fisher’s leading position in desktop sequencing. In addition to regulatory issues the $30 billion offer implies a 20% premium which may be too low for a deal of this magnitude, especially after Illumina rejected a Roche bid in 2011/2012 which was set at over a 60% premium.

The $30 billion offer would require TMO to issue 200 million new shares to cover the stock for stock transaction, a significant increase from $30 billion would be excessively dilutive for TMO shareholders. If Thermo Fisher includes cash in the deal the added leverage it would have to incur would likely negatively affect their credit rating as it did when Moody’s downgraded them after their $15 billion takeover of Life Technologies in 2014. Thermo Fisher is also aware that their proposal may open the floodgates for other competitors to top their offer and force them to the wayside.

Total short interest in TMO topped $1 billion for the first time since December 2013 when short levels were over $3 billion prior to the Life Technologies deal.  TMO total short interest stands at $1.1 billion, up 47% on the year. 

All three trend lines in the S3 Velocity Indicator, a measure of the real-time change in shorting activity, are trending up signifying strong shorting momentum in the Thermo Fisher. We expect short interest to continue to increase in TMO and borrow costs to remain at general collateral levels, the cheapest borrow cost for the easiest to borrow securities, as there are billions of dollars of inventory available to borrow. Additionally, short sellers should be emboldened to enter the trade as analysts, such as Cantor Fitzgerald and Wells Fargo, post negative commentary about the possible success of the deal as it stands today.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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