Struggles at Westcon - The remaining Westcon International business is facing difficulties on multiple fronts. As
with any ERP system upgrade, the implementation has been overdue and over budget. However, it’s important to
note that the company has gone live with the system in all geographies. Datatec first upgraded its ERP system in
North America in 2013. The International implementation is more challenging than North America as it is dealing
with dozens of countries compared to just the US and Canada. Additionally, Datatec concurrently did a business
process outsourcing implementation (subsequently abandoned) at the same time which brought its own issues.
Lastly, when they sold the America’s business they retained all the corporate level expense of Westcon and agreed
to keep all the support in place for one year to support Synnex at Datatec’s expense. This has left the company
with a bloated corporate structure that should begin being right sized in September 2018. All these issues
combined have left Westcon International losing money. In the 2018 FY (ends February), Westcon International
lost $72m in EBIT (before write downs) with 65% of the losses coming in the 2H as issues peaked. When the
company reported the Feb 2018 full year results in May they stated that business has improved and guided
towards breakeven in FY19. We gain confidence from the North America ERP implementation timeline which
severely disrupted the NA business. ERP implementation was complete in 2013 but it took 12-18 months to work
through the ensuing issues during which revenue fell 15% in 1H14 compared to 1H13 levels and margins fell from
3.9% in 2012 to 2.8% in 2014. After the implementation issues were resolved revenue rebounded by growing 75%
over the next 18 months and margins returned to normal from 2.8% in 2014 to 3.9% in 2016. The international
implementation is more difficult on many fronts and has faced more issues and worse financial results, but we gain
confidence from the North America case study and from the CEO’s open market purchase of $1.6m of shares in June
2018 and the CFO’s small open market in June 2018.
Share Repurchase – The company recently had a special meeting to get approval to buyback 5% of the company’s
shares in the months leading up to the Annual Meeting. At the Annual Meeting a new repurchase plan will be put
in place. The company intends to use the $105m leftover ($350m-$245m) from the special dividend to repurchase
shares. At the current market value this would equate to buying back 28% of shares.
We value Datatec using a sum of the parts analysis. There are three components to the valuation: Westcon,
Logicalis, and central/corporate.
We value Westcon International at $145m. This consists of a base valuation of $246m for their 90%. This valuation
is $2.7B in sales (achieved in 2015 and 2016) at a 2% EBITDA margin (achieved higher prior to ERP implementation)
at a 7.5x EBITDA multiple which results in a value of $405m. $405m less $131m in net debt is how we arrive at a
$273m equity valuation, of which they own 90%. Additionally, we assume an additional $110m in cash burn/value
destruction as they recover the business to be conservative. The last adjustment is an additional $9m in value from
an intercompany $90m loan from Datatec (100% owned) to Westcon Int. (90% owned). We feel this valuation is
very conservative and well below the $300m equity valuation at which Synnex bought the first 10%.
We value Logicalis at 14x EBIT (peer multiple average of Computacenter, Softcat,Bechtle, Atea, Dustin Group,
Proact IT Group, CDW Corp, Systemex, Insight Enterprises) which results in a value of $833m. Additionally, Logicalis
has net debt of $92m. This net debt is atypical and Logicalis is typical run with no debt. The debt is short term
working capital to fund for a special project that requires working capital and will unwind in a few years and
generate earnings along the way. Therefore, we do not view this debt as financial debt, but short-term funding
supported by inventory and do not subtract it from the value. Lastly, Logicalis only owns 66% of its Brazil subsidiary
which we estimate makes Datatec’s look through ownership of Logicalis’s consolidated financial results at 80%
(varies depending on relative strength of Brazil vs. rest of world). This results in a net value of $666m to Datatec.
Lastly, the corporate level has $309m in net cash, investments and loans and the Analysis Mason business which we
value at 7x EBITDA for $18m. We put a 10x multiple of the central headquarters costs of $13.5m for a value of -$135m.
$309 + 18m – 135m = $192m.