Making better than three-year highs this morning, shares of print and communications solutions provider Xerox (XRX 34.14, +1.46 +4.5%) trade firmly higher after announcing both better than expected Q4 earnings and news that the company would be taken over by Japanese imagining solutions company Fujifilm.
The more important news today is the latter. News broke this morning that XRX and Fujifilm had agreed to combine XRX and their longstanding Fuji Xerox joint venture in a deal which is expected to close in the second half of calendar 2018. The combined company boast annual revenues of $18 billion and leadership positions in key geographic regions.
Under the terms of the agreement, XRX shareholders will receive a $2.5 billion special cash dividend, or about $9.80 per share, funded from the combined company’s balance sheet, and own 49.9% of the combined company at closing. The cash dividend represents more than 30% of XRX’s unaffected share price of $30.35 based on closing share price as of January 10, 2018. Fujifilm will own 50.1% of the combined company and provide important operational support and transformational leadership.
Further, the deal is expected to deliver at least $1.7 billion in total annual cost savings by 2022, with about $1.2 billion of the total cost savings expected to be achieved by 2020. The targeted cost savings represent about 10% of the total cost base of the new Fuji Xerox and will drive significant margin expansion over the next four years.
Of the total $1.7 billion cost savings, $1.25 billion is related to the synergies that will be achieved through the transaction. In addition, the combined company will benefit from a cost reduction program commencing immediately at the existing Fuji Xerox joint venture, which is targeted to generate about $450 million of cost savings on an annualized basis. These amounts are incremental to XRX’s ongoing Strategic Transformation initiatives. The new company expects to incur about $1.4 billion in one-time integration and restructuring costs, mainly in the first three years.
As mentioned, XRX also beat market expectations for its Q4 and gave better than expected FY18 guidance. Q4 earnings of $1.04 per share and revenue growth of 0.5% year-over-year to about $2.75 billion were enough to beat the Street expectations for the quarter. Moreover, EPS guidance of $3.50-3.70 and revenue guidance of $9.9-10.1 billion also outperformed market expectations.
The important thing to get out of this morning’s news is that XRX will now be controlled from Japan. The company which was synonymous with office supplies and photocopies for the better part of the 70s, 80s and 90s has succumbed to waning photocopy demand. This next step will eliminate some jobs at XRX, but ultimately result in a more streamlined business.
During the past 52 weeks, XRX has advanced about 34% vs the S&P’s nearly 24% increase during that same period.