Ingram Micro Inc.; market cap as of 19/02/2016: $5.44bn
Tianjin Tianhai Investment Co., Ltd.; market cap as of 19/02/2016: $2.58bn
Introduction
On February 17, 2016, Tianjin Tianhai Investment Co., Ltd. (Tianjin) (SSE A Share: 600751 and SSE B Share: 900938), a container shipping and freight agency company, entered into a definitive agreement to acquire Ingram Micro Inc. (Ingram) (NYSE: IM), a California-based Information technology product wholesaler, in an all-cash transaction at an offer price of $38.90 per share. Ingram’s attractive valuation of $6bn entails a 31% premium to its closing price on February 17 and would make it the largest takeover target of a US information technology company, once cleared by the US authorities. The deal has been approved by both companies’ board of directors and is expected to be completed in the second half of 2016. Ingram Micro would become the largest member enterprise of HNA Group in terms of revenue, and facilitate the internationalization process of the group. The deal represents the rush of Chinese corporations for high-quality assets and the need to upgrade IT capabilities.
About Ingram Micro
Ingram Micro is a Fortune 100 company, which operates 4 main businesses: Technology Solutions, Mobility, Supply Chain Solutions, and Cloud Solutions, and delivers a full spectrum of technology and supply chain services to businesses around the world. It is the largest wholesale technology distributor based on revenues and a global leader in supply chain management and mobile device lifecycle services. Ingram distributes and markets products from such leading companies as Acer, Apple, Cisco, Citrix, Hewlett-Packard (“HP”), IBM, Lenovo, Microsoft, Samsung, Symantec and VMware and has operations in 38 countries. Ingram has completed many acquisitions over the years. It launched a cloud-computing-services portfolio in 2007. Revenues in 2014 amounted to $46.5bn (+9.2% YoY), out of which c. 61% were generated outside the US. Moreover, it had Q3 2015 revenues of $10.52bn which missed the forecasts of $10.77bn. Ingram has produced nearly $1bn in operating cash flow and $31.7bn in sales in the first 9 months of 2015 ended October 3. Based on Ingram’s press release, since 2012, they have generated a 28% revenue growth and their gross margin improved by 48 basis points. Ingram’s expansion into cloud services makes it a perspective player in a highly demanded field of IT solutions.
About Tianjin Tianhai Investment
Tianjin, formerly Tianjin Marine Shipping Co., Ltd., is a Shanghai-listed company, primarily engaged in marine transportation services. It is a part of HNA group which also represents its largest shareholder. The company operates its businesses through international and domestic shipping container transportation and related business. The major routes include International liner cargo shipping routes to South Korea and Southeast Asia, as well as domestic trade routes. Tianjin has now developed from a traditional marine shipping company into a modern logistic industry investor and operator, focusing on investment in logistic market segments, supply chain investment and management based on upstream and downstream of the logistic industry, as well as financing service for the logistic industry.
HNA Group is a Hainan-based Fortune Global 500 (464th) enterprise group, comprised of HNA Aviation, HNA Holdings, HNA Capital, HNA Logistics, HNA Tourism and Other Businesses (HNA Culture). It has more than $90 billion in assets, includes 11 listed companies and has c. 180,000 employees worldwide. In 2015, HNA Group declared revenues of c. RMB 190bn ($92bn). The conglomerate emerged from a local airline company, Hainan Provincial Airlines, which, under Mr. Chen, today’s Chairman of the Board of Directors of HNA Group, was actively expanding from the transportation to logistics and tourism. It has a history of successful multinational acquisitions, including U.S-based businesses. Namely, in 2015 it acquired Avolon (Aircraft leasing company), Swissport (Ground handling services) and Azul (a Brazilian airline). Moreover, in 2011, it acquired Seaco (Marine container leasing), part of General Electric.
Deal Structure
As previously stated, Tianjin Tianhai will acquire Ingram Micro for $38.90 per share. The deal is structured as an all-cash transaction which gives Ingram an equity value of approximately $6.0bn. Moreover, the price represents a premium of c. 39% over the average closing share price of Ingram Micro for the 30 trading days ended February 16, 2016. The market reacted positively with Ingram’s shares rising 23.6% to $36.65 in after-hours trading on the day the deal was announced. Viewed against peers, the valuation is one-third above Taiwan’s Synnex, but less than Chinese domestic peer Digital China on 22x. On the other hand, Ingram has more globally diversified revenues than its Asia-centric rivals. Ingram and Tianjin Tianhai Investment are to have $100bn in combined assets.
Following the completion of the deal, Ingram will be consolidated under Tianjin’s parent company HNA Group Co. Ltd and will operate as a subsidiary of Tianjin. As part of the merger agreement, Ingram Micro agreed to suspend their dividend and share repurchase program. On the other hand, the headquarters and the management team are expected to remain the same.
There is no go-shop provision included in the deal: a provision that would allow the public company that is being sold to seek out competing offers even after it has already received a firm purchase offer. The duration of a go-shop period is usually about one to two months. The initial bidder may match the new bids if it wishes to do so.
On the other hand, there is an “interloper” break-up fee of $120m. Moreover, the merger agreement provides that upon termination of the agreement under certain circumstances, Tianjin Tianhai would be obligated to pay Ingram Micro a termination fee which could, depending on the time that passes, range from $200m to $400m.
Tianjin Tianhai/HNA Group will fund the merger using its own funds as well as proceeds from financing. Tianjin Tianhai/HNA Group has good relationships with a number of financing institutions and Chinese banks, but the exact amount of the loan has still remained undisclosed. As previously stated, the merger would have to clear the regulatory approval but also the shareholder one. The merger must be approved by at least two-thirds of the stockholders of Tianjin Tianhai voting on the transaction at a special meeting called for that purpose. HNA Group will not be permitted to vote its shares in favor of the transaction.
Deal Rationale
One of the most interesting features of Ingram Micro is represented by its leading role and reputation established over the years as a leading distributor and a global provider of IT products and services. The California-based firm is considered unrivaled in its ability to offer innovative, differentiated and easy-to-manage solutions to vendors and customers all over the globe.
The deal is likely to benefit shareholders of both companies. Becoming part of the HNA Group will deliver short-term cash value to Ingram Micro’s stockholders and it will bring along a number of new opportunities for the company’s vendors, customers and associates. Indeed, HNA’s strategy is based on continuous innovation, the development of new services, brand management and, most importantly, it ensures the stability and continuity of the firms that take part to their group. Additionally, Ingram Micro would access a large organization meaning that it will benefit from complementary logistics capabilities and from a strong established presence in China that can further sustain its growth and profitability and accelerate its investments and execution.
For HNA, Ingram Micro represents a key acquisition not only because it would become the largest member enterprise of group in terms of revenue, but also because it could facilitate the internationalization process of the group. Indeed, the incorporation of the US company represents a unique opportunity for HNA to access emerging markets, which are characterized by higher growth rates and better profitability. Furthermore, integrating Ingram Micro would aid the logistics sector of HNA Group to transmute from a logistics operator to a supply chain operator, to provide one-stop services and maximize efficiency.
Another positive aspect of the deal is the approach HNA Group intends to use towards the target company after the post-acquisition implementation which is aimed at maintaining the leadership teams and core values that have made Ingram Micro a trusted partner and industry leader. The company will work on converging strategies and interests, while maintaining the culture of the target. Moreover, once the acquisition is completed, the Board of HNA Group plans to back Ingram Micro’s management team and strategies enabling the target to continue to distinguish itself among competitors and meet the needs of its vendor and customer partners better than ever before.
Considering the current macroeconomic environment, we can say that the acquisition is additional evidence of China’s willpower to acquire overseas technology assets to enhance its domestic potentials and replace imports. It is not a surprise that given the economic situation in China, domestic players will invest in quality assets in the US and Europe.
Regulatory impediments and fears
The deal is the latest in a series of investments by Chinese companies in U.S. tech companies. Especially interesting are the deals involving U.S. makers of computer chips that have attracted scrutiny on national-security grounds. As China’s economic growth is weakening, Chinese companies have become more aggressive in pursuing deals and increasing their interest in the overseas companies. Just a couple of weeks ago, ChemChina agreed buy Swiss agricultural company Sygenta for c. $44bn in what would be the largest outbound deal in China’s history. And although China’s appetite to acquire abroad is growing, it started to face regulatory issues which pose a potential problem. Namely, two potential takeovers were hindered which brought to light the obstacles Chinese companies might face in closing the deals abroad. In December, a group including China Resources Microelectronics Ltd. and Hua Capital Management Co. made a bid for Fairchild Semiconductor International Inc., which already had a deal with U.S. chip maker ON Semiconductor Corp. Fairchild rejected the Chinese proposal, stating a preference for the ON transaction. The reasons Fairchild cited, among other factors, were the risks that the deal would be rejected by U.S. authorities on national-security grounds. Another example is Royal Philips NV. In January the company terminated the planned $2.8bn sale of most of its lighting components and automotive-lighting unit to a Chinese buyer. It was not the first time the U.S. Committee on Foreign Investment blocks the deal; this time on national-security grounds. This concerns Ingram as well, as its move away from IT hardware middleman to provider of software solutions, which made it interesting to China in the first place, might also make it a sensitive deal for the US. Ingram provides services that offer the company access to industrial information across a wide range of US businesses.
Even with the regulatory issues, the Chinese companies are on their way to break their record for outbound acquisitions. The value of this year’s Chinese acquisitions overseas is equal to c. $80bn. In the full year of 2015, the value of attempted acquisitions amounted to a total of $112bn, according to Dealogic. This is to say that should these regulatory challenges be surpassed, the Chinese dealmaking could potentially be the 2016 driving force of mergers and acquisitions.
Financial Advisors
China International Capital Corporation Limited and Bravia Capital jointly acted as lead financial advisors to HNA Group. Weil, Gotshal & Manges LLP acted as HNA Group’s legal counsel.
Morgan Stanley & Co. LLC acted as financial advisor to Ingram Micro and Davis Polk & Wardwell LLP acted as Ingram Micro’s legal counsel.
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