HP Inc. claims it is open to talking to copier giant Xerox Inc. about some sort of a merger deal, but it is also embarking on a costly stock buyback plan in the hopes of winning over its investors in an upcoming proxy fight.
On Monday, HP HPQ, -2.64% announced a massive buyback, by increasing its current stock repurchase authorization plan to spend $15 billion — a little less than half of its current market valuation of $32.1 billion, and three times its current proposed repurchases of $5 billion, announced last October. HP said it would fund the buyback with cash and by taking on more debt, one of the many issues that it has with Xerox’s XRX, -4.07% improved buyout offer of $24 a share.
Yet at the same time, executives told MarketWatch on a call ahead of earnings that they would be open to talking to Xerox, and reiterated these comments on their conference call with analysts Monday.
“HP is reaching out to Xerox to explore if there is a combination that creates value for HP’s shareholders that is additive to HP’s strategic and financial plans,” HP Chief Executive Enrique Lores told analysts. But ultimately, it still appears to analysts and investors that HP is not willing to do a deal with Xerox as the buyer, for any price.
“It doesn’t sound like you’re open to being purchased by Xerox at any price, let’s say, $30 a share or more, simply because under any raise price you would still have the same grievances,” said Bernstein Research analyst Toni Saggonaghi on the call.
“We need to make sure that the resulting capital structure makes sense for the businesses where we will be operating,” Lores said.
Investors at least appeared to be buoyed by plans for the big buyback, but as the company’s call went on, its shares zig-zagged in extended trading. HP closed up 3.4% in the after-hours session.
HP also released its fiscal first-quarter results, which showed a business in decline, mostly due to printing, where sales dropped 10% in total units and 7% in its supplies business, mostly made up of ink, which is the biggest chunk of HP’s profits. Revenue at HP’s printer business has been gradually slowing in the past year and total fiscal 2019 revenue was $20 billion, down 3.9% from 20.8 billion in fiscal 2018. And in the first quarter, revenue in printing declined again 7% to $4.7 billion.
The outlook, even with all of HP’s restructuring efforts, is for sales in some parts of its overall portfolio to continue to decline, particularly in supplies.
“There’ll be parts of our portfolio that we continue to expect some declines, supplies being one of them,” HP Chief Financial Officer Steve Fieler told analysts.
Previously from Therese: HP investors should be girding for a proxy battle with Xerox, Carl Icahn
Some analysts hinted at concerns about mounting debt at the PC and printing giant, as it tries to save itself from a reverse merger with the smaller Xerox. HP executives said they are establishing a new capital structure plan with a debt-to-EBIDTA ratio in a range of 1.5 to 2 times, while disparaging that very element of the Xerox offer, which they said will have the highest debt-to-EBIDTA ratio in the S&P 500 Hardware Index.
“Considering the nature of our business, which operates with a negative cash conversion cycle as well as a macroeconomic cycle, this level of debt creates significant unnecessary risk,” Lores told analysts, when describing the company’s issues with the Xerox offer.
The biggest issue, of course, is value.
“Simply put, their proposal has a number of fundamental problems….The Xerox proposal does not reflect the value of our company or the plan that we announced today,” Lores said.
In the next few weeks, investors will be hearing a lot more from both companies heading into the HP’s annual meeting, expected to take place in April, where Xerox is offering a new slate of directors for HP’s board. HP appears to be girding for a fight at that meeting, but it’s feasible it could also strike some kind of deal with Xerox ahead of time.
If the impasse lasts to the meeting, investors will be faced with a tough decision. They could stay with the status quo, which includes HP’s recent tradition of restructuring the business about once a year, while promising this will be the change that makes a difference. The other option is merging two declining businesses and tossing in a bucketload of more debt, with yet another new management team and a new board loaded with appointees from activist investor Carl Icahn, who is behind the hostile shenanigans and is unlikely to stop the restructuring.
Neither outcome sounds pleasing, and the fact that HP’s executives talk about talking to Xerox, but don’t seem willing to actually saunter down that road, sets up even more confusion for investors.
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