Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Some radical economists think the best way to deal with the persistent threat of deflation in Europe is to abolish cash payments altogether. Banks could then charge customers for holding cash, thereby encouraging them to spend.

For Diebold and Wincor Nixdorf, the U.S. and German cash-machine makers, this is a scenario to induce a cold sweat. But it hasn't deterred Diebold from pursuing a $1.9 billion takeover of its rival to create the world's biggest ATM manufacturer.

Diebold and not so beautiful

Combining the two will trump market leader NCR, having a combined $5.2 billion in revenues and an installed base of almost one million cash machines. Yet greater scale doesn't necessarily mean greater riches, and the deal looks driven more by defensiveness than any cheerful assessment of the future.

Cash does still account for 85 per cent of global transactions. However, even if you don't believe prophesies of its looming death, it's still a very difficult time to be selling ATMs and cash registers.

Faced with near zero interest rates and tougher capital requirements, banks are slashing costs and closing branches. German banks have the capacity to cut 11,000 branches in their home market alone, according to Bain & Company. Meanwhile, there's the burgeoning threat from digital upstarts such as Apple Pay and Bitcoin.

Both Diebold and Wincor -- roughly equal in terms of revenues -- are already scrambling to respond by increasing how much money they make from software and services. Some 56 percent of sales at the merged company will be from these two sources, but it will need to push this higher. And while the purchase will expand Diebold's reach into Europe, it won't do much to lift the proportion of sales it gets from Asia, which will be about 18 percent post the deal. 

Diversifying Sales
Europe will account for a smaller proportion of the combined company's revenue
Source: Company presentation

Plus the restructuring efforts are taking a toll. Wincor is reducing headcount by 12 percent and the related costs caused net income to plunge 92 per cent in the fiscal year through September 30. Diebold started cutting sooner but is still under pressure because of faltering demand in emerging markets. Its full year revenue is projected to decline 7 to 8 percent.

Diebold shareholders might view the promised 160 million euros in yearly cost savings as attractive, but they will also have to swallow a two-thirds cut in the dividend to reduce leverage -- with net debt expected to be a punchy four times Ebitda after the acquisition.

For Wincor shareholders, the deal looks more attractive. Diebold's offer comprises 38.98 euros in cash and 0.434 Diebold shares per Wincor share, equivalent to about 54 euros per share. That's 40 per cent more than the share price in mid-October when the two sides confirmed talks, which looks generous given that it provides Wincor investors a partial exit from an industry with a difficult future.

That Wincor has shown itself so eager to jump at the offer is reason enough to give pause for thought to Diebold investors. It explains the 9 percent decline in Diebold shares this morning. Buying a rival restructuring case could well leave them out of pocket -- should such things continue to exist in our cashless future.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net