NCR Strategic Review Ends With Blackstone Taking A Stake

Earlier this year, the WSJ reported that ATM maker NCR Corp (NCR) was considering its strategic options, including a possible spinoff. A little digging revealed a spinoff to be a low probability choice and that a buyback or dividend seemed more likely to be in the cards as a new ‘shareholder friendly’ activity. Shortly thereafter though, the company attempted to sell itself to private equity firms in what would have been a massive LBO transaction. The deal attracted interest from all of the big boys including Carlyle and Blackstone (BX), but a final sale never materialized. Instead, a few months later, the company agreed to sell a 17% stake to Blackstone in exchange for $820m. Blackstone will receive convertible preferred shares paying 5.5% that convert into equity at $30 in addition to appointing 2 members to the board. Although the company touted numerous advantages in partnering with Blackstone and how it plans to invest for the future by focusing on software and services, it seems that all of the proceeds will be used to fund a $1b share buyback. Instead of purchasing shares in the open market, the ‘buyback’ here will actually be a ‘Dutch Auction’ tender with an expected offer between $26-$29.50 per share. Intriguing, a bit odd, but also massive considering the company’s entire market cap is ~$4.5b!

One activist investor in the name, PSAM, was disappointed in the decision to sell a stake to Blackstone and questioned the motivations behind the deal and the governance of the board. The fund had previously sent a letter to the Board noting how undervalued it thought its shares were. Perhaps some of the disappointment was fueled by the actions of a different activist, Marcato Capital, whose founder Richard McGuire was on the board and supported the deal. Shortly after the transaction was announced, Mr. McGuire actually resigned his directorship and issued a filing changing his firm’s NCR stake from active to passive. Upon stepping down, Mr. McGuire said that ‘it has been a pleasure to serve on the Board of NCR. I have confidence that the new Blackstone directors will bring ample analytical and strategic resources and a shareholder’s perspective to the Board.’ Perhaps the new Blackstone directors afforded him a new level of confidence in the shareholder friendliness of the company, but another idea suggested by the NY Post is that the deal afforded him a chance to quietly exit a losing investment. I prefer the Post’s headlines.

As of the end of last week, NCR’s shares were down ~9.5% on the year and the outlook for the company is murky. While once a stable cash flow machine just like its products, its core business is facing headwinds from new payment technologies reducing consumers’ needs for cash. The industry is shaking up a bit and Diebold (DBD) recently announced the takeover of competitor Wincor. NCR is a strong player, but it already carries a serious debt burden (even sans LBO) and a rough quarter earlier this year sent some of its leverage ratios spiraling into worrisome territory. Perhaps that is why it went the convertible route, but this is still an odd transaction to fund a buyback. Some investors might be pleased with a buyback and Blackstone’s involvement, but ultimately, the key will be how the company adapts to the ever changing business environment. What do you think?

Disclosure: Author holds no position in any stock mentioned.