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NCR: Explores Breakup as Buyout Fizzles
Andy Li CFA - Senior Analyst Semiconductors / Technology
EXECUTIVE SUMMARY
- NCR is exploring a split into two entities – one focused on ATMs and associated software and services, and the other focused on retail / hospital point-of-sale and digital commerce solutions. Each business has ~$4 bnin annual revenue. ATMCo has the slight edge in profitability and cash flow, while CommerceCo has somewhat more favorable top-line trends..
- Our preliminary thoughts are that ATMCo could target net leverage closer to ~5x, up roughly one turn from NCR’s current 4.0x, while CommerceCo could target ~3x net leverage. However, the company is still evaluating potential deal structures, which will be “heavily dependent upon the ultimate tax structure.” The company is aiming to complete the transaction by the end of 2023, though remains open to alternative options in the meantime.
- A spin-off would likely involve use of a leverage-based RP carve-out, so we think it’s more feasible for existing NCR debt to remain with the less levered entity, which would be CommerceCo. In this scenario, ATMCo would issue fresh debt and pay the vast majority of proceeds back to CommerceCo for debt reduction.
NCR bonds sold off following the company’s announcement of a proposed breakup after the widely reported buyout talks with Veritas apparently fell through. The 2027s are down 5 points and the 2030s down 13 points vs. the unaffected price from last Thursday’s close. Investors were clearly pricing in high odds of a successful sale (which we expected as well) given that Veritas was reported to have secured much of the financing in late August. A sale would have likely triggered change of control puts at 101 on the bonds. With the deal fizzling, NCR bonds have re-rated and are now trading in-line with the B index and slightly wide to XRX, which we think reflects the company’s existing credit profile plus some level of general event risk.
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