Carl Icahn is setting up a fight for control at Illumina after what the activist investor called an "ill-advised and frankly inexplicable" acquisition of Grail. In response, ILMN stock surged Monday.
Icahn sent a letter to Illumina shareholders, criticizing the $8 billion takeover of cancer screening player Grail — a deal that took place despite opposition from European regulators. He plans to nominate three people to Illumina's board of directors.
But Illumina says the nominees don't have the skills and experience to join the board. They include two former Icahn employees, Jessie Lynn and Andrew Teno, and a former employee, Vincent Intrieri. The board recommended in a written statement that shareholders veto Icahn's nominees.
In after-hours trading on the stock market today, ILMN stock rose a fraction. During the regular session, shares surged 17% to close at 226.94. Shares are consolidating with a buy point at 248.97, according to MarketSmith.com.
ILMN Stock: Earnings Under Pressure
Icahn criticized the Illumina's Grail saga in a series of bullet points. Grail makes a cancer screening test called Galleri. Using a blood sample, Galleri screens for more than 50 types of cancer.
Illumina formed Grail in 2016 for early cancer detection. Three years ago, Illumina said it reached a deal to buy Grail for $8 billion. But regulators in the U.S. and Europe balked, saying this would give Illumina an unfair advantage in the market. Illumina acquired Grail over their objections.
"Perhaps overpaying for the venture business can be forgiven, but it is inexplicable and unforgivable that under these circumstances the management team and board of directors went ahead with the deal anyway without first ascertaining whether they would get clearance from the European regulators," Icahn said in his letter.
He noted since buying Grail, Illumina stock has dwindled. Shares peaked in February and August 2021, and have since dropped off. Illumina wrapped its Grail acquisition in August 2021. Last September, the European Commission prohibited Illumina's acquisition of Grail.
Since then, Illumina has had to hold Grail as a separate entity on its balance sheet. This is problematic, Evercore ISI analyst Vijay Kumar notes, because Grail is still spending $500 million to $700 million each year despite the financial market conditions deteriorating.
"If Grail had been like any other recent (initial public offering), we suspect the company would have had a massive restructuring plan and right-sized its spending in light of tightening capital markets," he said. Instead, Grail's spending has increased at the cost of Illumina's earnings.
"This is the crux of the issue, the (earnings per share) deterioration has weighed on shares," he said.
Kumar has an outperform rating and a 250 price target on ILMN stock.
Illumina Bats Back At Icahn
Illumina says Icahn doesn't understand the regulatory process.
"Icahn's letter neither recognizes the real value that Grail can provide to Illumina's shareholders, nor reflects an understanding of the regulatory process," the company said.
Illumina says it's in the process of divesting Grail "unless Illumina wins the jurisdictional appeal in the meantime."
Evercore's Kumar and Canaccord Genuity analyst Kyle Mikson both believe in Grail's approach. It might just be too long of a horizon for Illumina's investors to see, Kumar said. Mikson noted Illumina stock will likely rise as the separation from Grail "becomes more likely or closer to fruition."
It's hard to predict the outcome of a proxy fight, Canaccord's Mikson said. A proxy fight could lead to a turnover in management.
"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," Mikson said in a note to clients.
Mikson has a buy rating and 300 price target on ILMN stock.
Follow Allison Gatlin on Twitter at @IBD_AGatlin.
