| Scitex (Nasdaq: SCIX) is at a crossroads. This is not new, but it seems the company can no longer postpone a decision about its fate. For over a year, IDB Development Corporation, which controls Scitex, has been struggling to make up its mind about what to do with the company. In the end, they will have to decide whether to live with Scitex, i.e. merge its digital printing activities into a single company, or liquidate it. That means selling Scitex’s operations, or distributing its holdings to its shareholders.Scitex has three main holdings: 27% of Canada’s Creo Products (Nasdaq: CREO TSE: CRE), which operates in the preprint field; 100% of Scitex Vision, which develops wide format printers; and 100% of Scitex Digital Printing, which develops digital printers. Scitex also has stakes in several start-ups in the printing industry. The most prominent is an 18% stake in Aprion Digital, which develops digital printers.In any event, Scitex’s largest and most influential holding, for good and bad, is in Creo. Scitex and Creo joined together 18 months ago, when Scitex acquired 13.25 million Creo shares, following the merger of Scitex’s preprint division with Creo. The shares were worth $550 million at the time. Although Scitex was not given management authority in the merged company, the deal seemed like a good idea at the time. But the waning of business affected the share price, and the share package is now worth $145 million, compared with its peak value of $680 million.
As a result of the worsening business and plunging share price, Scitex tried to find a buyer for its shares. Unfortunately, no company was interested in becoming a significant shareholder in Creo, without commensurate control. Furthermore, Scitex had the option of selling the share on the stock market, which is apparently what it plans to do. “The Wall Street Journal”reported yesterday that Scitex plans to sell 5 million Creo shares on the market, which probably explains the 13% fall in its price. In short, Scitex is trying to get rid of Creo, and the feeling seems to be mutual.
After Creo-Scitex’s management left Israel against the backdrop of disagreements with Creo’s management, there do not appear to be any good reasons for Creo to maintain operations in Israel. Yesterday, the company announced it was changing its name from Creo-Scitex to Creo, and while this may be merely a semantic change, it may be an omen.
“At the moment, the Israeli operations have become almost meaningless, except for the printer for Xerox (NYSE: XRX) color photocopiers,” claimed an print industry source today. “There are 900 employees in Israel now, compared with 1,100 a year ago. There have not been any lay-offs. It’s simply that many employees left. Creo is lucky that labor market conditions are bad, otherwise more employees would have left. The company’s business situation is problematical and the atmosphere there is poor.
“Today, operations in Israel are divided between the manufacture of electronic and manual printers, and R&D. In my opinion, as time passes, Creo will realize that its activities in Israel are superfluous. Businesswise, there appears to be room to transfer manufacturing out of Israel and reduce operations here to a minimum. However, moving some of the R&D, especially in printing-on-demand, will not be so easy. This activity, which competes against Electronics for Imaging (Nasdaq: EFII), is growing nicely, and business volume will probably reach $35-40 million a year. Turmoil there will probably be avoided.
“To some degree, the merger 18 months ago has achieved its emotional goals. Scitex’s preprinting division was growing, and Creo succeeded in getting rid of the name ‘Scitex’. But the business results speak for themselves, and the merger failed. Third quarter revenue was only $140 million, less than Scitex sold before the merger, and almost the revenue of Scitex’s preprinting division before the merger. The share price expresses the failure, having fallen drastically. The capital market does not believe in the company, and the big loser is Scitex and its shareholders.”
It is easy to grade the merger now. However, without the merger, the situation of the two companies might have been worse than the situation of the merged one. Either way, while the intentions of Scitex’s management and shareholders regarding the Creo stake are fairly obvious, the big question hangs over the attitude toward the other holdings.
Scitex’s two active holdings, Scitex Vision and Scitex Digital Printing, will probably be sold or merged with comparable companies. The negotiations between Scitex Vision and Nur Macroprinters (Nasdaq: NURM) are on hold at the moment. Spinning off the two companies is impossible because neither is traded. The most logical scenario is an internal merger of the two companies to save costs.
Two weeks ago, the group published its financial results. Scitex wrote off $35 million (in addition to an earlier $150 million write-off) of its Creo investment, and valued it at $150 million. However, Scitex’s own activities also worsened. Although Scitex Vision and Scitex Digital Printing had similar performances compared with the preceding quarter – revenue of $24.8 million and $41.8 million, respectively – they also greatly increased their cash burn rates.
“We had collection problems in the third quarter,” claimed Scitex CFO Yosef Zylberberg at the time. “July and August are traditionally weak for payment, because of the summer vacation. September is considered a strong month in terms of payment. However, after the terrorist attacks in September, customers stopped paying and collection was significantly affected.”
Scitex’s accounts receivable totals $89 million, which is rather worrisome. It is $17 million more than in the second quarter of 2001, reflecting four months of customer credit. “Accounts receivable is still serious, despite some improvement in October,” says Zylberberg. “We have no reason to fear bad debts at the moment, despite increasing our allowance for doubtful debts by $700,000. We are expecting difficulties in payment, but our customers will pay. People are simply holding onto their money and offering various excuses to avoid paying on time. The commonest excuse is that the check is in the mail.”
Zylberberg is demonstratively optimistic about the long-term future of the two subsidiaries. In fact, they have weathered the global recession quite well so far. The geographical distribution of sales in the third quarter was still quite balanced: North America 34%; Europe 24%; the Far East and the rest of the world 32%. Scitex Digital Printing’s revenue in the third quarter was, as mentioned above, $41.8 million, compared with $42.5 million in the preceding quarter, and sales of the nine-inch version of its Scitex VersaMark product line continue to grow.
Scitex Digital Printing’s third quarter gross profit was $15.5 million, 37% of revenue. This was lower than in preceding quarters, because of changes in the product mix and the higher revenue from services and perishables, compared with sales of systems and components. Scitex Digital Printing’s operating profit, before amortization of goodwill, was $1.7 million, compared with $2.7 million in the preceding quarter.
Scitex Vision’s third quarter revenue, as mentioned above, was $24.8 million, compared with $23.9 million in the preceding quarter. The company’s operating profit, before depreciation of intangible assets, was $3.1 million, compared with $2.9 million in the preceding quarter.
Published by Israel’s Business Arena on 21 November 2001 |
