TheStreetSweeper alerts investors to the latest negative event subsequent to our July 6 report on the massive risks facing Kornit Digital Ltd (NASDAQ:KRNT) – an event that suggests the stock price should plummet to $5 per share or lower.

A top competitor, Italy-based Reggiani has been acquired by Electronics for Imaging for about $84.2 million, plus ~$56.2 million over 30 months of milestone achievements. The deal announced last week presents two big negative implications for Israeli inkjet printing company, Kornit. These are particularly worrisome as the company attempts the critical expansion from the T-shirt makers’ market into the roll-to-roll market. Roll-to-roll printers allow images to be printed on fabrics that are then sewn into garments, wallpaper, furniture coverings, etc.

First, Reggiani, already a top rival whose sales jumped 61 percent between 2012 and 2013 to ~$76 million, will likely become a roll-to-roll gorilla.

The acquisition by Electronics For Imaging, Inc. (NASDAQ:EFII) means the re-branded EFI Reggiani will be able to use the money and advanced distribution channels afforded by EFII. So it will negatively impact Kornit’s future potential – as Kornit tries to get its commercial roll-to-roll printer launched in about 18 months.

Second, this deal should have a downward effect on Kornit’s valuation today. The deal means EFII is unwilling to pay an acquisition anything close to Kornit’s current ~6 times revenue and ~50 times EBITDA.

Indeed, EFII has shown that it’s willing to pony up only 1.8 times revenue and 7-12 times EBITDA. That means, it would pay no more than about $56 million to $127 million for Kornit, which equals $1.88 to $4.26 per share. That equates to a fraction of the $420 million market valuation.

EFII wouldn’t be a buyer at the current level and neither should any other logical investor.

Important Disclosure: The owners of TheStreetSweeper hold a short position in KRNT and stand to profit on any future declines in the stock price.

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