Consultants, investment banks and potential buyers are zeroing in on a valuation for Ingram Micro Inc. as chatter picks up again that its Chinese parent is selling the Irvine-based distribution giant.
A buyer could get it as low as $5 billion, a 17% discount on the $6 billion purchase price paid by owner HNA Group in 2016, according to a Business Journal analysis.
“HNA paid more than a fair premium, especially since there was very little synergy,” a source with knowledge of Ingram Micro’s internal operations and who has recently discussed valuations with potential financiers told the Business Journal last week.
HNA Group, a Hainan-based Fortune Global 500 company with major operations in aviation, tourism and logistics, is facing a cash crisis. It intends to sell its stake in Ingram Micro, Deutsche Bank AG and the vast majority of its overseas acquisitions, the Wall Street Journal reported earlier this month.
Reuters in May also reported Ingram Micro was being shopped around.
Ingram Micro, the world’s largest technology products distributor and previously Orange County’s largest public company by revenue, was sold for a 30% premium in late 2016 to Tianjin Tianhai Investment Co., a unit of HNA Group.
“The view is that the business has done OK, but to get that [$6 billion] value in a sale could be quite difficult,” the source said.
That’s largely because HNA may have overpaid for Ingram Micro, though while in the tech industry, is a distributor infamous for low-margins. Ingram purchases billions of dollars of inventory every quarter and then sells these goods and related services through resellers and other distributors.
For example, it reported an adjusted second-quarter profit of $161 million, a 1.4% margin on revenue of $11.8 billion.
Spending Spree Pains
Financial troubles at HNA surfaced last year after it went on a $50 billion spending spree the previous few years in a bid to diversify holdings. It reportedly has debt eclipsing $90 billion.
HNA has unloaded about $13 billion in assets so far this year, according to the Financial Times, and has suspended equity trading on a few of its major business units as it sells real estate and other assets to improve its financial position.
The company is trying to return to its core business of operating airlines, according to the Wall Street Journal. It was further thrown into turmoil when co-founder and former Chairman Wang Jian fell to his death during a July trip in France.
HNA was struggling so much that it asked some employees to use their paychecks to invest in the company, promising returns of 8.5% for $1,500 and up to 40% for $15,000, the New York Times reported in February.
There’s no indication that employees of Ingram Micro, which employs about 900 in Irvine, received the emails.
The assets HNA wants to sell are valued at more than $10 billion, according to the Wall Street Journal.
“We do not comment on rumor and speculation,” Damon Wright, Ingram Micro’s vice president of corporate communications, said in an email.
In January, Ingram told the Business Journal that HNA’s troubles wouldn’t affect operations or its financial strength.
That’s primarily due to the financial and regulatory framework that separates the companies—a requirement mandated in the sale by the Committee on Foreign Investment in the U.S., an influential Treasury Department agency that reviews some foreign transactions involving U.S. companies.
Chief Executive Alain Monie told the Business Journal in a February interview that operations haven’t changed much for Ingram Micro since it was taken private. Monie was promoted in 2012 from president to succeed Greg Spierkel in the top post.
Local Stability
The distributor entered the year as Orange County’s 14th largest foreign-owned company by employee count, the same as a year earlier. It’s HNA’s largest revenue generator by far and OC’s.
The parent company’s tumult doesn’t appear to have affected operations at Ingram Micro’s Park Place headquarters, home to the executive team, corporate functions and some research, development and engineering work.
Ingram’s local operation has shed only about 50 jobs since March 2015, according to Business Journal research.
“The real synergy comes from taking the back office, all the overhead,” the source said. “You can consolidate that and pull out $200 to $300 million in costs. A strategic buyer makes a lot more sense.”
Potential suitors include smaller rivals that are publicly traded: Clearwater, Fla.-based Tech Data Corp. (Nasdaq: TECD), Arrow Electronics Inc. (NYSE: ARW) in Centennial, Colo., and Phoenix-based Avnet Inc. (Nasdaq: AVT).
Tech Data in 2016 acquired Avnet’s technology service business for $2.6 billion.
Like Ingram Micro, these competitors are lightly valued by Wall Street despite their enormous sales.
Potential Buyers
Chinese firms have also been linked to Ingram Micro—China Huarong Asset Management Co. reportedly held initial discussions, according to Reuters. However, a foreign buyer might again have to gain U.S. regulatory approval, a tough hurdle amid growing trade tensions, particularly with China.
The world’s most populous country last week imposed tariffs of 5% to 10% on $60 billion worth of U.S. products hours after President Donald Trump levied tariffs on $200 billion worth of Chinese goods.
Roger Kay, who has been a technology analyst for more than 20 years, said a Chinese buyer could be the best suitor.
“The invisible lords would change, but the company would not be perceived much different. That’s seems to be the Occam’s razor possibility, the most likely thing. Local handled locally,” said Kay, founder and president of Endpoint Technologies Associates Inc. in Wayland, Mass.
“But you could ask the question now whether there is a national security issue the administration or some other people might raise,” he added.
The Trump administration in March blocked Broadcom’s (Nasdaq: AVGO) $121 billion hostile takeover of chipmaker rival Qualcomm Inc. (Nasdaq: QCOM), citing national security concerns that the acquisition would result in the U.S. losing its edge in fifth generation 5G wireless technology development research to China.
