Xerox targeting USD 100m for M&A

Provided exclusively by Mergermarket

Xerox [NYSE:XRX], the Norwalk, Connecticut-based document technology and outsourcing company, could spend around USD 100m on acquisitions, according to CFO William Osbourn.

On Tuesday’s 4Q16 earnings call, the CFO noted that Xerox expected to have between USD 1bn and USD 1.2bn in cash available for capital allocation, with USD 300m anticipated for debt repayment, USD 280m in dividends and approximately USD 175m for capital expenditures.

“And we are currently targeting approximately USD 100m for M&A, which leaves somewhere between USD 145m and USD 345m to be deployed opportunistically and according to our capital allocation priorities,” he said.

A presentation slide stated opportunistic uses included debt repayment, M&A and pension contributions.

Osbourn noted that Xerox had a number of dynamics to cover in terms of its capital structure following the spin-off of Conduent [NYSE:CNDT]. He explained that Xerox needed to carry less core debt as a smaller and less diversified company and had lowered its total debt to keep its core leverage within the target range, giving it more financial flexibility.

In his prepared remarks, CEO Jeff Jacobson noted that Xerox had completed the spin-off of Conduent, its business process outsourcing (BPO) operation, on 31 December 2016.

In the Q&A session, JPMorgan analyst Paul Coster asked about the M&A criteria.

“Our acquisitions will be in areas that we are clearly experienced with, that are close to our knitting. Areas that we understand,” Osbourn replied.

The CFO named the global imaging services area as historically of interest, noting that Xerox typically bought multi-branded resellers and converted them into its own brand. He said this had previously generated very good returns.

“We have paid a multiple in the range of one times revenue and we look, to the extent that they are the right opportunities in doing those types of acquisitions in 2017 and beyond, not only in the US but internationally,” he continued.

Osbourn said the company would likely pay a higher multiple for acquisitions in the workflow automation and software technology spaces, depending upon the specifics of the potential transaction.

CEO Jacobson added that Xerox was looking for targets that would allow the company entry into markets it couldn’t currently address well. As an example, he said production color was a USD 5bn market growing at 5% and it would help Xerox a great deal to have technologies in the commercial offset print and packaging market within that area.

Xerox announced in January 2016 that as a result of a review of the company’s portfolio and capital allocation options announced in October 2015, the board had approved a plan to separate Xerox into two independent publicly traded companies. The BPO company, which had approximately USD 7bn in 2015 revenue, was split-off and named Conduent, while the document technology company, with 2015 revenue of around USD 11bn, remained as Xerox.

Having been a prolific acquirer for over a decade, Xerox’s M&A efforts have been quieter since the review was announced in 2015. Its only notable buy since this time was the March 2016 acquisition of Imagetek Office Systems, an Arlington, Texas-based full service document solutions and service provider, for an undisclosed sum.

While the majority of Xerox’s acquisitions have been of US-based assets, it has also been active in Europe and Canada. In-country law firms Fasken Martineau Dumoulin and Osborne Clarke have been used in Canada and the UK, respectively. UK-based firms have also advised on multiple deals in continental Europe, according to the Mergermarket M&A database.

Financial advisory matters are typically handled in-house, although JPMorgan and Blackstone Advisory Partners were used on its largest deal in the past decade. The latter has also advised on the sell side.

Lazard and Goldman Sachs served as financial advisors and Cravath, Swaine & Moore as legal advisor to Xerox on the business separation. Centerview Partners and Paul, Weiss, Rifkind, Wharton & Garrison advised the board.

Xerox reported a cash balance at year end of USD 2.2bn and debt of USD 6.3bn. The company has a market capitalization of USD 7.1bn.

As seen in the mergermarket newsletter on 02/02/2017


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