Tech Data To Buy Avnet's IT Business: A Win-Win For Both?

Two IT distributor giants – Avnet Inc. (NYSE:AVT) and Tech Data Corporation (NASDAQ:TECD) – stole the limelight in the stock market yesterday following the announcement that Avnet is selling its Technology Solutions business to Tech Data.

Shares of Avnet gained approximately 7% during yesterday’s trade, making up the most of its year-to-date fall. On the other hand, Tech Data shares hit a new 52-week high of $85.58 before closing trade at $84.80, representing an intraday gain of 22.3%.

The Agreement

Per the agreement, Avnet will sell its Technology Solutions business to Tech Data for a total consideration of $2.6 billion. The transaction will include both cash and stock. Avnet will receive $2.4 billion in cash and 2.785 million shares of Tech Data, which translates into a stake of approximately 7% in the company.

Apart from this, the two companies intend to extend their relationship through partnering on delivering end-to-end Internet of Things (IoT) solutions.

Gibson, Dunn & Crutcher LLP is acting as legal advisor to Avnet, while Citi and Allen & Company LLC are its financial advisors. BofA Merrill Lynch and Raymond James and Associates are acting as financial advisor to Tech Data, while Gottlieb Steen & Hamilton LLP is serving as its legal counsel.

Why it Makes Sense for Tech Data

Having started off with selling computers and printing products, Tech Data has emerged as one of the key distributers of data center products such as storage and networking products over the years. The business has contributed over 30% of its last fiscal total revenue. Therefore, Tech Data Chief Executive Bob Dutkowsky believes that the acquisition of Avnet's IT business will open up avenues for further expansion in this area.

Dutkowsky further added that the integration will help it in distributing “end-to-end solutions from the data center to the living room”, which will include products at all points, i.e. from cell phones to WiFi networks.

Following the transaction, Tech Data will get access to a new market, i.e. Asia-Pacific region. Upon completion of the deal, Tech Data’s operations will expand to 35 countries from the existing level of 21 countries. Apart from this, the buyout will strengthen Tech Data’s distribution capabilities in Europe and the Americas.

From the financial standpoint, the company believes that if the transaction was made a year ago, it would have increased revenues for the 12 months ended Jul 31, 2016 to approximately $35 billion from $26 billion. This would have happened primarily due to an increase in revenue contribution by complex and higher-margin data center offerings from 29% to 45%. Pro-forma non-GAAP operating profit for the same time frame would have also doubled, after taking into account the expected cost savings.

The company now anticipates the transaction to be significantly accretive to its non-GAAP earnings per share in the first year after closing. Additionally, it projects annualized cost savings of approximately $100 million after two years of the closure of the transaction. Additionally, it expects to realize about $200 million in present value of tax benefits.

Benefits for Avnet

The divestment of the Technology Solution division will allow Avnet to focus on high growth areas such as marketing electronic components and related products in the supply chain. The company intends to use its resources on making investments in embedded solutions, IoT and critical digital platforms as well as expanding its footprint in new markets.

Avnet anticipates gains in the range of $3.75 to $4.75 per share upon completion of the transaction.

Our Take

Both the companies have got shareholders approval for the transaction and expect to complete it in the first half of calendar 2017, subject to customary closing conditions and regulatory approvals.

The transaction seems to be a win-win situation for both the companies. Both companies expect that the transaction will allow them to focus on their respective core strategies and scale their businesses, thereby enhancing shareholders wealth.

However, in our opinion, the transaction will benefit Tech Data the most as it will not only boost its top and bottom line performance, but also expand its global reach and strengthen its competitive position against arch rivals such as Synnex Corp, Ingram Micro (NYSE:IM) and Arrow Electronics (NYSE:ARW) . But it all depends on whether Tech Data manages to integrate Avnet’s IT business smoothly.

Currently, Avnet carries a Zacks Rank #3 (Hold) while Tech Data has a Zacks Rank #4 (Sell).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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