TomoTherapy Downgraded at Robert W. Baird

Robert W. Baird downgraded its rating on shares of TomoTherapy Inc. (NASDAQ: TOMO) to neutral from outperform with a price target of $5, as the company's shares move within 5 percent of the proposed takeout value.

Accuray Inc. (NASDAQ: ARAY) plans to buy TomoTherapy for $277 million in a cash ($3.15/share) and stock (0.1648 share of Accuray per TomoTherapy share) deal that would currently translate to about $4.64 per TomoTherapy share ($4.80 per TomoTherapy share at time of announcement).

We estimate deal valuation about 0.5 times of Enterprise Value/Trailing Twelve Months sales, and while low by medtech standards and a discount to what TomoTherapy might have commanded over next 18-24 months given improving margin trends, heightened near-term competitive risks make it hard for us to argue with deal price, said Jeff Johnson, an analyst at Robert W. Baird.

Johnson sees several strategic synergies that lead him to believe this deal makes sense. Meaningful Selling, General & Administrative (SG&A) expense savings, including $25 million in duplicative general & administrative and marketing cost synergies already identified by management.

Johnson said service-related synergies, including both product and infrastructure, as a larger installed system base (over 570 systems ww on combined basis) and Accuray's technological expertise in the service area (37 percent service margins for Accuray) should, over the next 18-24 months, help address the negative service margins TomoTherapy has been generating in recent years.

Johnson said technological synergies over coming years also seem likely, as the companies benefit from each other's strength in radiosurgery (Accuray) and radiotherapy (TomoTherapy). Given relatively small shares of the $3.8 billion worldwide radiation therapy market for Accuray (5 percent) and TomoTherapy (5 percent), Johnson sees little to no risk of FTC issues.

With TomoTherapy shares currently trading within about 2 percent of updated takeout value, given some risk created by the equity portion of this deal and a 3-4 month closing window, and low likelihood of other suitors (strategic or financial) stepping in, in our opinion, we're downgrading TomoTherapy to Neutral, said Johnson.

TomoTherapy shares closed Monday's regular trading up 24.52 percent at $4.57 on the NASDAQ Stock Market.