Xerox grabs $24bn from banking titans to fund hostile takeover of HP Ink

CEO and co-chair Visentin writes to HP board to say: Let's get this thing done

Xerox has climbed a financial hurdle in efforts to snaffle HP Inc by convincing three banking giants to stump up the greenbacks to partly fund the $33bn hostile takeover bid.

Citigroup Inc, Mizuho Financial Group and Bank of America have agreed to lend Xerox up to $24bn in “binding financing commitments”, Xerox confirmed in an open letter to Enrique Lores and Chip Bergh, HP CEO and chair of the board respectively.

Xerox CEO and vice chair John Visentin wrote:

“Over the last several weeks we have engaged in constructive dialogue with many of your largest shareholders regarding the strategic benefits of our proposal to acquire HP. It remains clear to all of us that bringing our companies together would deliver substantial synergies and meaningfully enhanced cash flow that could, in turn, enabled increased investments in innovation and greater returns to shareholders.

“But it also became clear from our dialogue with your shareholders that you and your advisors have been questioning our ability to raise the capital necessary to finance our proposal. We have always maintained that our proposal is not subject to a financing contingency, but in order to remove any doubt, we have obtained binding financing commitments (that are are subject to any due diligence condition).”

Visentin signed off by saying his offer still stands to meet the pair in person, “with or without your advisors, to begin negotiating this transaction”.

The months-long saga began in early November when HP confirmed it has received an offer, which comprised of $17bn in cash and 0.137 Xerox shares for each unit of HP stock.

When the talks first became public, HP had a market cap of $27.27bn compared to Xerox’s $8.05bn. At the time of writing, HP’s valuation has risen to $29.83bn but Xerox has slipped to $7.88bn.

HP’s board claimed this offer undervalued its business and presented Xerox with a string of questions before it agreed to enter into mutual due diligence. These included ones about Xerox’s future revenue trajectory and business prospects, given the steep decline in sales; and the potential impact of outsized debts on the merged company’s stock.

Then began the tit-for-tat process of Xerox CEO and vice chairman John Visentin warning HP of a hostile takeover bid; HP saying Xerox still hadn’t answered its questions; and then Xerox doing the inevitable and sidestepping HP's board to charm shareholders directly.

That charm offensive took the form of a 33-page document that detailed $2bn of synergy savings from a leveraged buyout, as well as the $1bn to $1.5bn of "potential growth opportunities" that will only be realised via a merger, and a capital return policy ranging from 50 to 75 per cent of annual free cash flow.

For its part, HP has said it doesn't need Xerox, that it has a strategy to return the print division to growth after a lacklustre fiscal '18 caused by uncertainty in its print supplies business. Lores only took the helm at the start of November and has put in place a restructure to save costs.

In and amongst all of this noise is corporate raider Carl Icahn, who has twice (here and here) gone public with his desires for a merger. He owns 4.24 per cent of HP's stock and 11.85 per cent of Xerox's stockholding.

Icahn accused HP's board of being "irrational" and claimed the deal is a "no-brainer". As Reg readers know, Carl has a habit of often getting what he wants and this is shaping up to be more of the same. ®