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Cash Printers

26 November 2019 by jbchevrel

HP Inc (HPQ) provides imaging and printing systems, computing systems, mobile devices, solutions, and services for businesses and households. HPQ sells laser and inkjet printers, scanners, copiers and faxes, PCs, workstations, storage solutions, and other computing and printing systems, worldwide. HPQ’s story started in a Palo Alto (CA) garage in 1939. At the time they were building audio oscillators, calculators, and other geeky stuff. In 2015, HPQ resulted from a split from Hewlett Packard Enterprise (HPE). HPE sells servers, software, storage, networking and associated services. Over the past few years, HPQ has oscillated between the #1 and #2 position in global market share for both printing systems and computers. The credit fundamentals are relatively sound. HPQ’s gross leverage is about 1x, with both total debt and EBITDA at close to $5B, and it holds ~$5B cash on top of that. Before any M&A consideration, of the expected excess cash flow of ~$3B (for FY 2019), HPQ was expected to pay ~$1B dividend, leaving ~$2B for debt refinancing, piling cash & buy back stock. HPQ has ~$2.5B of debt to refinance across 2020 and 2021. Once that is done, the company (assuming continued FCF generation) will have more space to pile up cash (~1B/year) or do buyback/M&A. That positive scenario for credit (5y CDS ~65bp on nov 5 London close) was challenged on Nov 5. On that day after our London close, the WSJ reported that Xerox (XRX) was looking at a takeover of HPQ. This was a $8B company preparing to make a mixed cash-and-stock offer for a $27B company (without considering that XRX would have likely paid a premium on top of HPQ’s market value). Contrary to XRX’s arguments, some analysts argued that a combination could be dangerous for the proforma IG rating. HPQ is currently rated BBB (S&P )/ BBB+ (F) while XRX is currently rated BB+ (S&P )/ BB (F). HPQ 5y CDS widened up to 115bp (up 50bp in two sessions) on Nov 7 close, in after this announcement. HPQ management then showed signs of skepticism on XRX's ability to raise enough cash, to achieve their synergy assumptions ($2B) and to generate consistent revenue over time. Over the weekend, in a letter to XRX, HPQ management made it clear that a combination was not needed. Today XRX in a letter said to HPQ that they will go directly to the shareholders to pitch a deal. ‘Xerox will take its compelling case to create superior value for our respective shareholders directly to your shareholders. The overwhelming support our offer will receive from HP shareholders should resolve any further doubts you have regarding the wisdom of swiftly moving forward to complete the transaction.’ The CDS, closed 89bp (-1) on the 5y after a non-eventful session, now in the middle of the recent [65,115] range.