Tuesday, November 21, 2006

Calls of Note Part 5

- Citigroup notes Novellus Systems (NASDAQ:NVLS) traded up ~8% today as checks suggest a growing view among buyside investors that NVLS is a potential M&A target - either for private equity or a larger competitor. Recent cancellation of attendance at two conferences (LEH and CS) has fueled this view.

While their analysis of financial and strategic fits indicates TEL (#2 equipment supplier) as a plausible consolidator in a competitive takeover, they view a TEL/NVLS deal as being unlikely given cross-border M&A has historically proven difficult + TEL's success at integrating acquisitions in the past is mixed.

With respect to private equity interest, firm's work (in conjunction w/ input from Citi's risk arb team) indicates a NVLS deal under typical debt/equity assumptions and a ~25% equity premium would drive only ~11% IRR, or well below the typical 20-30% hurdle rate for PE deals - even in this environment.

Maintains Hold and $32 tgt on NVLS.

Notablecalls: There was some serious action in NVLS yesterday but I think Citi's comments will put a cap on that move.

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