Analysis of a vanishing breed: HP-Scitex Vision- A perfect fit

Dov Ofer

Negotiations were not easy; they lasted over a year with ups and downs, but a deal was closed in the end. Scitex Corp. Ltd. (Nasdaq:SCIX; TASE:SCIX) subsidiary Scitex Vision Ltd. will be sold to US printer and photocopier giant Hewlett-Packard Corp. (NYSE:HPQ) for $230 million in cash.“Personally, besides being very tired, we’re also very pleased,” said Scitex Vision president and CEO Dov Ofer on Friday. “I think we’ve made a great deal for our employees, shareholders and customers. This is a cash transaction with a reputable company, with substantial know-how and capabilities in digital printers, and with a positive history of investment, and staying in Israel. It was already clear to us a year ago that the market was consolidating, and we had to figure out how we’d fit in. Our number one candidate was Hewlett-Packard.”The acquisition of Scitex Vision supplements Hewlett-Packard’s range of wide format printing solutions and digital printers. Hewlett-Packard has bought Scitex Vision’s printer head and ink technologies, which will give it a broad competitive edge. Additional synergy is likely in ink technologies, peripheral services, and support of distribution channels and the chain of supply.

$1 billion in three years

This is Hewlett-Packard’s third investment and second acquisition in Israel. Its biggest acquisition was Indigo in 2002 for $720 million. Two years later, Hewlett-Packard invested $100 million to build HP-Indigo’s ink plant in Kiryat Gat, and it is now paying $230 million in cash for Scitex Vision. In the past three years, Hewlett-Packard has invested over $1 billion in Israel. The present investment strengthens Hewlett-Packard’s position as one of the largest foreign investors in Israel.

Scitex currently owns 77.1% of Scitex Vision (70.6% fully diluted), Clal Industries and Investments Ltd. (TASE:CII) and Discount Investment Corporation Ltd. (TASE:DISI) each own 7.2% (6.6% fully diluted), and company employees own most of the rest. Under the terms of the agreement, HP will pay approximately $230 million in cash to Scitex Vision, of which $24 million will be retained in escrow for 24 months to cover possible indemnification claims and an additional $24.5 million will be utilized to repay Scitex Vision’s retained liabilities, mainly to Israeli banks. In other words, the acquisition includes Scitex Vision’s liabilities.

Scitex is expected to report a capital gain of $75-95 million on the deal. It will receive $100-110 million in cash (excluding its share of the funds in escrow), after the payment by Scitex Vision of retained liabilities to third parties, certain taxes, transaction-related and liquidation payments, and other fees and expenses, which will be added to Scitex’s $141 million in cash reserves. Discount Investment believes that it will make a capital gain of NIS 120-150 million, and Clal Industries will make a capital gain of NIS 122-153 million.

IDB Holding Corp. Ltd. (TASE:IDBH) vice chairman Avi Fischer said, “When the control over the IDB group was changed two years ago, a commitment was made to take all steps needed in order to create shareholder value. Accordingly, we are very excited with this value-creating transaction which, together with the sale of the business of Scitex Digital Printing to Eastman Kodak Company at the beginning of last year and other smaller transactions, have created value of over $300 million for Scitex’s shareholders. We thank the Scitex team and wish success to Hewlett-Packard and the Scitex Vision employees who will shortly join this major corporation.”

Scitex’s demise is definitely more respectable than could have been imagined during the change in ownership of IDB, when Scitex was fighting for market share.

“Globes”: Hewlett-Packard wasn’t the only the only company in the picture when negotiations began. Why did they take so long? After all, you reached a preliminary agreement back in February.

Ofer: “First, Hewlett-Packard is a very cautious company. It has very high standards, and conducts due diligence the likes of which I’ve never seen. No stone was left unturned in Israel or around the world. Second, subsequent negotiations were tough, not over the value of the deal so much as about other aspects. There have been good deals at lower values, and bad deals at higher values, so figures are often misleading. In any case, I can say that the negotiations never broke down. There were ups and downs, but contact with Hewlett-Packard was never broken off. It was always in the picture.”

What was Ofer referring to when he mentioned good and bad deals? He was apparently hinting at the prolonged negotiations in which Electronics for Imaging Inc. (EFI) (Nasdaq:EFII), founded by Efi Arazi, acquired VUTEk, Inc. for $281 million. VUTEk was a private company that was reportedly growing more slowly than Scitex, but was much more profitable over a longer period. Capital market sources believed that EFI was an initial candidate for acquiring Scitex Vision.

If VUTEk was acquired for $281 million, why was Scitex Vision satisfied with a lower value? This reportedly disturbed the rest of Scitex’s shareholders. In retrospect, it could be said that in terms of EBITDA (earnings before interest, taxes, depreciation and amortization) multiples, Scitex Vision got a much higher price, but obviously profit and earnings multiples are interesting, too. The case of VUTEk made it clear that Scitex Vision had no choice. It had to link up with a large player, and could not pursue an independent path.

Deutsche Bank Securities and William Blair & Co. (which collaborates with Poalim Capital Markets – Investment Bank Ltd. in Israel) advised Scitex Vision in its negotiations with Hewlett-Packard. Both Ofer and Scitex president and CEO Raanan Cohen handled the negotiations, accompanied by Scitex chairman Ami Erel and Fischer, on behalf of IDB. Since Scitex Vision is a private company, Scitex will probably not file a proxy document detailing the negotiations process.

“We wouldn’t sign if the price wasn’t right”

Scitex Vision examined alternatives while a final deal still hung in the balance, but in the final stages it did not negotiate with any other company for an acquisition. This did not prevent it from considering an acquisition of Nur Macroprinters Ltd. (OTCBB:NURM). Scitex Vision reportedly considered acquiring Nur, because it is financially troubled and burdened by a bank debt (although the banks are helping out a bit). Nothing came of it, and Nur is still seeking an investor or buyer who can move the company forward.

Scitex Vision also mulled an IPO on Nasdaq, and there were rumors that a company value was over $300 million. “Throughout the negotiations, we had plan B an IPO,” said Ofer. “We didn’t enter into negotiations with Hewlett-Packard with intent to sign a deal with them at any price. If the deal had fallen through, we’d have gone with an IPO or something else.”

In other words, the option wasn’t realistic, and was only a negotiating ploy?

“Of course not. The alternative of an IPO always existed and was absolutely realistic. If the negotiations failed, we’d have carried it out. On the other hand, an IPO isn’t a strategic measure but a purely financial one, and wouldn’t have moved us forward strategically. The market is changing, and I wouldn’t want to compete against the company that Hewlett-Packard would have bought instead of us.”

What about the values? They were higher for the IPO. You might have given greater value to your shareholders.

“It’s true that the values were higher, but an IPO is an apple in the tree, not in your hand. After all, it doesn’t only depend on a company’s performance, but also on 1,001 other external variables. We’ve found the most suitable strategic partner, and we were able to close a deal here and now, rather than wait for some future event that might not materialize.”

Ofer says all of Scitex Vision’s managers and employees will keep their jobs, and that the company will become a separate unit with Hewlett-Packard, the same as HP-Indigo. “There won’t be any lay-offs,” he promises. He said he convened a conference call with all of Scitex Vision’s managers on Thursday night, to tell them about the deal. A conference call with the company’s employees was held the next day.

“We’ll figure out how to celebrate later,” says Ofer. “We’re not celebrating the past. We’re looking forward, and we want our string of successes. Even a deal like this one with Hewlett-Packard won’t cause us to lose our focus. I hope that the coming quarter will be our eleventh consecutive quarter of profitable growth.”

The Scitex Vision-Hewlett-Packard deal is expected to be closed within 60-90 days, when all the necessary regulatory permits are obtained.

In a press release, Hewlett-Packard VP and general manager, Large Format Business Enrique Lores said, “The purchase of this business from Scitex Vision will further accelerate Hewlett-Packard’s push into the rapidly growing digital printing market. Wide-format signage is one of the fastest growing opportunities in the market. Currently, 17% of printing in this area is done digitally, and we expect that to double within the next five years. Scitex Vision is one of the leading companies in this space, with a strong customer base, unique products and technologies and an outstanding customer support organization.”

In a separate press release, Hewlett-Packard (Israel) general manager Gil Rosenfeld said the acquisition of Scitex Vision would strengthen Hewlett-Packard activities in Israel. “This acquisition shows that Hewlett-Packard is showing intensive and constant interest in the Israeli market, and considers it a profitable and promising investment channel. We’re therefore continuing to invest in the Israeli market, with an emphasis on the potential of Israel’s human capital.”

Scitex

Scitex will no longer have any activities, following the completion of the transaction, and will probably be classified as a passive foreign investment company for US federal income tax purposes in 2005 and/or in subsequent years. In addition, upon and subject to the closing of the transaction, Scitex Corporation will license its rights to the “Scitex” tradename to Hewlett-Packard. Scitex Corporation has also agreed, subject to shareholder approval, to change its corporate name. One thing is certain: it will no longer be in the printer business.

Published by Globes [online], Israel business news – www.globes.co.il – on August 15, 2005