NCR Flirts With Junk in Priciest Deal to Boost Margin: Real M&AJuly 19, 2011, 11:15 AM EDT
By Joseph Ciolli
July 19 (Bloomberg) -- NCR Corp. is so determined to boost margins that the world’s biggest supplier of ATMs is risking its investment grade rating on the most expensive acquisition by an integrated computer systems company in more than a decade.
NCR has agreed to buy Radiant Systems Inc., the maker of self-service ticketing machines at movie theaters and checkout software for retailers, for $1.1 billion including net cash. At 20.6 times earnings before interest, taxes, depreciation and amortization, last week’s deal would be the priciest takeover greater than $300 million by an integrated computer systems maker since 2000, according to data compiled by Bloomberg.
While NCR needs Radiant to increase operating margins that lag behind all 13 of its U.S. peers, Standard & Poor’s has placed the Duluth, Georgia-based company’s credit rating on review for a potential downgrade to junk. NCR is seeking $1.1 billion in debt to finance a transaction that will give the company a bigger presence in retail, restaurants and hotels and add a business that makes four times as much operating profit per dollar of sales, data compiled by Bloomberg show.
“They definitely are clearly stating they want to increase margins, and they’re ready to risk their credit rating on the assumption that this deal will work out,” said Michael Yoshikami, chief investment strategist at YCMNet Advisors, which manages $1.1 billion in Walnut Creek, California. “They realize they’re in a rapidly changing environment, and they need to do something to stay relevant.”
Karen Leytze, a spokeswoman for Radiant, didn’t respond to e-mail or telephone messages requesting comment.
“Radiant’s business is growing faster with 15 percent compound revenue growth over the past six years and has a stronger margin profile,” Richard Maton, a spokesman for NCR, said in an e-mail response to questions. “Acquiring Radiant would significantly expand our available market by as much as $8 to $10 billion.”
The deal will add to earnings next year, he said.
NCR agreed to purchase Alpharetta, Georgia-based Radiant on July 11 for $28 a share in cash, a 37 percent premium to the company’s 20-day stock trading average, data compiled by Bloomberg show. At $1.1 billion it’s NCR’s biggest takeover, and almost four times bigger than its next largest deal -- the $280 million purchase of an additional 27 percent stake in NCR Japan Ltd. in 1998. The Radiant deal, expected to close in the third quarter, will help NCR expand in restaurants, retail and entertainment venues.
Hotels and Movies
Radiant, which offers touch-screen terminals, kiosks and handheld wireless devices for hotels, convenience stores, movie theaters and boutique retailers, also makes complementary software and provides subscription services to customers. Radiant’s technology, combined with its ability to bundle hardware, software and services, can be applied to all of NCR’s retail businesses, said Gil Luria, an analyst at Wedbush Securities Inc. in Los Angeles.
At $1.1 billion, including the assumption of about $76 million in net cash, the deal values Radiant at 20.6 times Ebitda of $53 million in the last 12 months, data compiled by Bloomberg show.
That’s the most expensive multiple that an integrated computer services company has paid in a deal greater than $300 million since 2000. Sema Plc, the Anglo-French computer-services company, agreed to buy LHS Group Inc., an Atlanta-based maker of software for mobile phones, that year for $3.5 billion, or 49.5 times Ebitda, data compiled by Bloomberg show.
“It’s an expensive deal,” YCMNet’s Yoshikami said of the Radiant purchase. “They’re very cognizant of the fact that margins and growth are issues. Adding a company like Radiant is going to help increase NCR’s growth rate. Given what NCR needs to do to improve their business, the price paid was reasonable.”
NCR makes self-service kiosks that allow customers to check in at airports and hotels or to rent movies in grocery stores. It’s also the largest supplier of ATMs globally based on installations, according to the company. NCR is recovering from the ATM business’s difficulty during the financial crisis, and the acquisition may help accelerate profit growth particularly in the retail division, Wedbush’s Luria said.
“The retail business that NCR currently has is much lower margin that Radiant’s,” said Zahid Siddique, a portfolio manager at Rye, New York-based Gabelli & Co., which owns NCR shares. “It’s a slow growth business, whereas the Radiant business is a higher margin, higher growth business with recurring revenues. That’s the key rationale.”
NCR paid Blockbuster Inc. for the use of its name on movie- rental kiosks, for which NCR collects all of the rental fees. It’s disputing Dish Network Corp.’s claim that the contract to license those kiosks is invalid after Dish’s acquisition of bankrupt Blockbuster in April. NCR is exploring “strategic options” for the DVD kiosk business after receiving interest from outside parties, Chief Executive Officer William Nuti said on the July 11 conference call regarding the Radiant deal.
NCR said it will raise about $1.1 billion in new debt to finance the acquisition of Radiant, prompting S&P to place NCR’s BBB- rating, the lowest level of investment grade, on credit watch negative for a potential downgrade to junk. S&P estimates that NCR’s debt-to-Ebitda ratio will rise to 3.4 times, up from 2.2 times at the end of the first quarter, according to a July 11 statement. The company plans to reduce leverage to below 2.5 times by the end of 2012, according to the ratings company.
NCR already has about $1 billion of unfunded pension liability, S&P said.
“The timing caught a lot of people off guard because NCR is still in the tail end of dealing with an underfunded pension program,” Wedbush’s Luria said. “A lot of shareholders felt like they would’ve rather waited for the balance sheet to get cleaned up with the pension issue before NCR made a big deal.”
NCR said in a regulatory filing last week that it’s seeking a $700 million term loan and a $700 million revolving line of credit to fund the deal and general corporate purposes.
Increasing the company’s long-term debt by $1.4 billion would lower its ranking under Bloomberg’s Company Credit Ratings by four levels to B2H, one level below investment grade. Bloomberg’s ratings analyze borrowers based on their indebtedness, profitability and other financial ratios.
“We have discussed the transaction with our credit rating agency and we believe our pro forma capital structure is robust and does not merit a change in rating,” NCR’s Maton said. “A change in rating would not materially impact the company as we execute our strategic plan.”
NCR, which generated more than $130 million in free cash flow in the last 12 months, will likely be able to pay down the borrowings and preserve its debt rating, Wedbush’s Luria said. NCR had $480 million in cash and equivalents as of March and only $11 million in debt, data compiled by Bloomberg show.
“I don’t think from a debt perspective it’s a bad deal,” Gabelli’s Siddique said. “They’re generating cash, so it will come down pretty fast.”
NCR’s operating margin of 2.5 percent in the last 12 months trailed all 13 other U.S. makers of integrated computer systems with market values greater than $500 million, data compiled by Bloomberg show. The average was 13 percent for the industry, which includes makers of ATMs, computer systems for hotels and restaurants and systems to create three-dimensional models.
The addition of Radiant, which posted an operating margin of 10 percent in the same period, may boost NCR’s margin to 4.7 percent, said Wedbush’s Luria.
“The company is being very decisive in stating that they want to grow margins to the point that they’re willing to risk taking a downgrade to get those margins,” YCMNet’s Yoshikami said. “They have to be right.”
--With assistance from Tara Lachapelle and Michael Tsang in New York and Cliff Edwards in San Francisco. Editors: Sarah Rabil, Daniel Hauck.
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