HP Again Rejects Xerox Acquisition Offer

Earlier this week, Xerox sent a letter to HP Inc. management stating that it had obtained $24 billion in binding loan commitments from Citi, Mizhuho, and Bank of America for acquiring HP.

On January 8th, HP responded by sending a letter to Xerox, again rejecting Xerox’s $33.5 billion cash-and-stock acquisition offer ($22 per share; HP is currently trading at about $21 per share).

In the letter, HP states that Xerox’s offer for HP “significantly undervalues HP.”

The full text of the letter is as follows:

“We reiterate that the HP Board of Directors’ focus is on driving sustainable long-term value for HP shareholders. Your letter dated January 6, 2020 regarding financing does not address the key issue – that Xerox’s proposal significantly undervalues HP – and is not a basis for discussion. The HP Board of Directors remains committed to advancing the best interests of all HP shareholders and to pursuing the most value-creating opportunities.”

Will Icahn Nominate HP Board Members?

Currently, backed by investor Carl Icahn, the majority shareholder in Xerox, Xerox is threatening a hostile takeover of HP by appealing directly to HP shareholders. December 25th marked a one-month period in which HP shareholders can nominate members to the HP board of directors. According to Evercore analyst Amit Daryanani, there is a “high probability” that either Icahn/Icahn Enterprises, which has 4.24 percent of HP shares, will nominate a full slate of HP directors. If HP shareholders approved these new Icahn-backed directors, these directors would try to force HP to accept Xerox’s acquisition offer.

Xerox has also been meeting with HP shareholders trying to push the deal, arguing that the industry needs to consolidate, and “that the combined company could cut at least $2 billion in costs. However, the new merged company would take on the debt Xerox would have to take on to purchase HP. However, Xerox argues “that the required leverage (debt) would be quickly reduced over time given HP’s ample cash flow.”

Our Take

HP’s “ample cash flow” has been significantly reduced lately due to lower supplies revenues. That’s because ink and toner revenues – once the lifeblood of HP – has been sharply declining, due not only to lower print volumes in general, but unrelenting competition from third parties. While HP has a plan to reverse lower supply revenues, it will take some time for to realize benefits, and the plan itself – which involves higher-priced printers that can accept third-party supplies – presents risk.

Meanwhile, overall, it doesn’t seem likely that HP will be keen on using its reduced cash flow to bankroll a Xerox leveraged buyout of itself. But probably more of a concern for HP is Xerox’s declining revenues, revenues that have been declining since June 2018. While consolidation offers some benefits for HP, it’s our opinion that they’re not enough to outweigh these concerns, and that HP will continue to reject Xerox’s advances.

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