Lexmark Takeover Seen With Shares Cheapest in Industry: Real M&A
Lexmark International Inc. (LXK) is poised to lure potential buyers with the least expensive technology valuation in America as the printer company’s closure of its inkjet operations spurs takeover speculation.
While Lexmark’s decision to close the inkjet business and cut 13 percent of its workforce prompted a 14 percent rally on Aug. 28, the company’s enterprise value is still 2.1 times earnings before interest, taxes, depreciation and amortization. That’s less than every computer-related corporation in the Standard & Poor’s 500 Index and second-lowest overall in the benchmark gauge for U.S. equities, according to data compiled by Bloomberg. Before this week’s rally, Lexmark had fallen 43 percent in 2012, worse than 99 percent of S&P 500 companies.
Lexmark’s actions, which leave the Lexington, Kentucky- based company with laser printers and a services division, show the $1.5 billion corporation may be preparing itself for a sale, Raymond James Financial Inc. said. Xerox Corp. (XRX) is the most logical buyer and could snap up a business once valued at more than $12 billion with only a year’s worth of free cash flow, according to Loomis Sayles & Co.
“They’re starting to be an acquisition target,” Federico De Silva, an analyst at Gartner Inc. in San Jose, California, said in a telephone interview. “The problem is they’re in an industry that is maturing very rapidly, shrinking in many segments, and they’re becoming too small of a player when everybody else is diversifying.”
Jerry Grasso, a spokesman for Lexmark, declined to comment on whether the company is open to takeovers.
The shares peaked at $74.13 in December 2006, before the worst U.S. recession since the Great Depression and a shift toward digital, instead of printed, documents drove the stock down to $21.07 yesterday. The company had seen its inkjet business shrink before deciding to close it. Shipments dropped to 2 million last year from 18.4 million in 2005 amid competition from Hewlett-Packard Co. (HPQ)
Lexmark said on Aug. 28 that it plans to exit the inkjet hardware business, eliminating about 1,700 jobs worldwide and closing a manufacturing facility in the Philippines by the end of 2015. The restructuring will save $95 million annually starting that year, Lexmark said.
“This inkjet decision, while difficult, is necessary to drive improved profitability and significant savings,” Lexmark Chief Executive Officer Paul Rooke said this week on a conference call. “We are focused on creating a higher-value portfolio.”
The company also said it’s working with strategic advisers on a potential sale of its inkjet-related technology.
“It’s a psychological positive,” Brian Alexander, an analyst with Raymond James in St. Petersburg, Florida, said in a phone interview. “It shows management is not asleep at the wheel, as some have suggested. They were fairly decisive in exiting the business.”
Lexmark generated about 15 percent of revenue from inkjet hardware and related services, according to an Aug. 28 report from Chris Whitmore, a San Francisco-based analyst at Deutsche Bank AG. Sales at Lexmark amounted to $4.17 billion in 2011, down 0.6 percent from 2010 and 20 percent below the 2005 level.
The remaining business includes laser printers and a division that manages corporate printing systems, including maintenance and supplies. At current prices, a buyer could purchase the company’s equity for 5.1 times profit.
Before the rally on Aug. 28, Lexmark’s price-earnings multiple was 4.6, lower than every S&P 500 stock except Best Buy Co. and Cliffs Natural Resources Inc., data compiled by Bloomberg show. Best Buy has attracted takeover interest from its founder.
Today, Lexmark shares rose 2.2 percent to $21.53, posting the biggest gain among technology companies in the S&P 500.
Lexmark’s printers and services would complement Xerox’s offerings and give it more enterprise customers and scale, said Tony Ursillo, a Boston-based technology analyst for Loomis Sayles. Xerox could acquire Lexmark for about the $1.59 billion it generated in free cash flow last year, he said.
“Xerox would be a reasonable suitor,” Ursillo said in a phone interview. “They’re already essentially serving the same markets with similar types of products and services.”
Hewlett-Packard, which got almost a fifth of its $127 billion in revenue last year from its printing and imaging unit, could also be a buyer of Lexmark, said Todd Lowenstein, a Los Angeles-based fund manager for HighMark Capital Management Inc., which oversees $17.5 billion including Hewlett-Packard shares.
Karen Arena, a spokeswoman for Norwalk, Connecticut-based Xerox, and Michael Thacker of Palo Alto, California-based Hewlett-Packard said their companies don’t comment on speculation, when asked whether they are interested in Lexmark.
Lexmark’s free cash flow and balance sheet may even lure the attention of private-equity firms, Lowenstein said. Its operations generate cash, after deducting capital expenses, amounting to 12 percent of its market capitalization, almost twice the average of printing and imaging companies valued at $1 billion or more, data compiled by Bloomberg show.
Lexmark also had $275 million more cash than debt at the end of the second quarter, the data show. The company said in its Aug. 28 statement that it’s still planning to return more than half of free cash flow to shareholders through dividends and buybacks and that it will spend $100 million on share repurchases through the end of the year.
“The balance sheet is sterling,” Lowenstein said in a phone interview. “The cash flow characteristics are very attractive even though the business is in decline.”
Short sellers increased bearish wagers against Lexmark shares to an almost four-year high of 24 percent of shares outstanding on Aug. 27, according to data compiled by Markit. The technique involves the sale of borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder.
Analysts are also projecting a decline. The average share- price estimate among analysts surveyed by Bloomberg is $18.50, or 12 percent less than yesterday’s close.
“While we commend the actions taken to focus on growth areas in software and solutions, these actions may take longer to yield results,” Credit Suisse Group AG’s Alban Gashi wrote in an Aug. 29 report, referring to Lexmark’s restructuring plan. The company is about to enter a “difficult transition” in a “challenged environment,” the analyst said.
Still, Lexmark has a shot at finding a suitor as it focuses on laser printers by winding down its inkjet operations, according to Lowenstein.
“If they can get their house in order and think about selling or disposing of the inkjet business and really focus on the laser side of the business, they could dress themselves up and make themselves attractive” to a private-equity firm or competitor, he said. “Either could make sense under the right conditions.”
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