The offer price of $17.25 per share represents a 33% premium over IkonÆs 60-day average stock price up to August 26 and a premium of 11% on Tuesday's close. For fiscal 2007 Ikon registered revenues of $4.2 billion, down 1.4% year-on-year. But Ikon posted an Ebitda from recurring operations of $203 million and a 4.9% operating margin, up from 4.1% the previous year.
Ricoh is paying a revenue multiple of 0.38 times trailing revenues. Lehman Brothers research issued yesterday estimates Ricoh is paying 16.9 times forward 2009 earnings and commented that RicohÆs valuation of Ikon is reasonable. But it is not clear how Ricoh will address problems such as revenue and margin pressures caused by a difficult economic environment.
Ricoh will finance the deal through cash on its balance sheet and external funding. It did not disclose any details of the financial impact of the deal. In an update on Ricoh yesterday MoodyÆs said it had placed the Japanese firm on review for a possible rating downgrade of its A1 rating saying ôalthough this transaction may help further strengthen Ricoh's global sales power and stabilise overall cash flow, Moody's is concerned that it may constrain Ricoh's financial flexibility over the medium termö. Ricoh is advised by Morgan Stanley, while Ikon is represented by Goldman Sachs.
Ricoh provides digital office solutions including MFPs (multi-function printers), printers, fax machines, semiconductor related products and digital cameras. RicohÆs business is largely Japan-centric with almost 50% of the firmÆs revenues derived from the local market.
Ikon supplies and services office equipment, such as MFPs and fax machines in the US, Canada and Western Europe. It has 400 sales and service locations and a strong roster of clients. The companies are familiar with each other as Ricoh is a supplier to Ikon.
Analysts commented favourably on the geographical diversification Ricoh gained as a result of the acquisition, the growth of its overseas distribution network and direct sales presence, and the new areas such as document outsourcing it was moving into. But analysts also questioned how Ricoh would manage a firm which derives 60% of its revenues from Canon, one of RicohÆs closest competitors. Lehman research commented: ôThis puts Canon and Ricoh in an awkward relationshipö. Ricoh said it aims to replace Canon's products with its own over the next few years.
Activist investor Warren LichtensteinÆs fund Steel Partners started buying shares in Ikon in 2005 picking up a 5.4% stake. It explained in its Securities & Exchange Commission filing at the time that it believed Ikon was under-valued and that is was considering seeking board representation, buying further shares, and/or proposing ways to boost earnings. Steel Partners has increased its stake in Ikon to 13% since then.
In a letter to Ikon in August last year Lichtenstein expressed regret that Ikon would neither enter a confidentiality agreement with Steel Partners to give him the ability to suggest alternatives for the company based on a review of further information, or give Steel Partners proportionate representation on the Ikon board.
Ikon subsequently in November announced a share repurchase plan for up to $500 million of its stock at $15 per share; Steel Partners agreed to a standstill on further actions with respect to its shareholding in Ikon until May 2009, when the share repurchase would be completed.
Lichtenstein will be a large beneficiary of the Ricoh takeover as it is estimated he bought shares around $10.50 apiece and did not tender in the share buyback.
IkonÆs shares have expectedly moved up towards the offer price after the deal was announced, gaining 9.4% to close at $17.02 on Wednesday and gaining further to $17.39 yesterday.
RicohÆs shareholders seem confident the firm will benefit from the deal as they pushed up the share price by 3% to Ñ1,777 ($16.26) yesterday. Lehman maintained its price target of Ñ2,030 on Ricoh.
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