January 12, 2018

Breakingviews: Fujifilm Has Chance to Ink a Solid Deal With Xerox

by Breakingviews.

Fujifilm could ink a good deal with Xerox. While a full purchase of the U.S. printer and copier-maker would be gutsy, a narrower deal could make sense for the $19 billion Japanese group.

On Wednesday a source-based story in the Wall Street Journal said the duo were discussing an “array” of potential transactions, including a change of control at Xerox. However one source told the newspaper a complete takeover was off the table.

That Xerox is in play is not surprising. The digital era has been unkind to the company whose name is synonymous with photocopiers. A big spinoff in 2016 failed to appease activist Carl Icahn, a near-10 percent shareholder, who last month lambasted the firm’s leadership in an open letter to shareholders. Analysts polled by Thomson Reuters expect sales to fall more than 3 percent this year, although Xerox should eke out a 4 percent increase in earnings as net margins tick up.

Fujifilm is a natural partner, given that the two companies already operate together in Asia and Australasia via a 75-25 joint venture called Fuji Xerox. Yet an acquisition would be punchy for Fujifilm. Assuming a 25 percent premium, a cash deal for the whole of Xerox could top $14 billion, including debt. Fujifilm currently enjoys solid investment-grade credit ratings, but such a transaction would make a big dent in a strong balance sheet. Embracing leverage is risky too, given the ongoing upheaval in core Fujifilm business lines such as cameras and printers.

A megadeal would also contradict Fujifilm’s stated strategy. The group has earmarked 500 billion yen ($4.5 billion) for mergers – hardly enough to buy Xerox outright – while talking up the potential for growth in newer fields such as regenerative medicine and medical imaging. Meanwhile, a $341 million accounting scandal at Fuji Xerox in Australia and Zealand cast doubt on management’s grasp of overseas outposts, let alone their ability to digest a huge global purchase.

There is little obvious benefit to taking full ownership of Fuji Xerox. Fujifilm already holds an economic majority and board seats to match. However, the unit could expand if Xerox sold other regional businesses to the JV. A focused agreement may be worth printing.

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