NCR: Investment Thesis Update
In my previous article on this subject, I wrote,
The Blackstone Arrangements So Far: Good For Blackstone And Exiting Common Stock Holders; Not So Much For The Company And Remaining Shareholders
The situation remains much the same today for common stock shareholders. The only way an investor can realize a return from an investment in shares is through receipt of dividends and/or gains on sales, regardless of company performance. There is very often a dichotomy between the perceived financial performance of a company and the returns achieved by shareholders. For NCR common stock shareholders, this dichotomy is exacerbated by the existence of preference shares and actions of management. The results of these have been detrimental to common stock shareholders and to the benefit of preference shareholders. This is discussed in more detail further below. Common stock shareholders are not receiving dividend income, and this is unlikely to change. Common stock share repurchases increase the percentage of the company attributable to preference shareholders and have not resulted in meaningful and sustained increases in common stock share prices. Meanwhile, preference shareholders are receiving dividends in the form of additional preference shares, at 5.5% per year. From Q1 2020, the company has the option to pay these dividends in cash. Blackstone (NYSE:BX) managed an exit of 49% of their 100% ownership of preference shares in early 2017, at prices in excess of $48 per share. Coincidentally, at that time, the common stock share price climbed above $49 for a short period. This supported Blackstone’s sale of 49% of the preference shares. That provided an opportunity for some common stock shareholders to exit with good profits, before the share price quickly sank back to the low $30s. Those who did not exit at that time have seen the share price continue to ratchet down to a low of $20.93, on December 26, 2018. Since that time, talk of a trade sale caused an increase in the share price to ~$33 by mid-June 2019. Here is the sequence of news from Seeking Alpha –
Wed May 8, 2019 – RBC sees over $40/share for NCR buy
RBC says NCR could be worth in the mid-$40s in a takeout based on a sum-of-the-parts calculation. Yesterday, Bloomberg sources said NCR was seriously considering interest from PE firms…. DA Davidson doesn’t see a “clean sum-of-the-parts” breakup and thinks the fit for a potential buyer is murky.
Mon May 20, 2019 – Warburg Pincus in purchase talks with NCR – DealReporter
NCR is working with Bank of America Equities as it again considers a sale, according to DealReporter sources….Warburg Pincus has reportedly been in talks with NCR for the past few weeks, but Apollo Global Management and other PE firms are hanging around the process.
Tue June 18, 2019 – NCR -6.5% as Apollo, Warburg walk – NYP
NCR plunges 6.5% after hours following a New York Post report that PE firms interested in purchasing the company have walked without a deal…. Sources say Warburg Pincus and Apollo Global Management (APO) backed off in recent weeks, and no new bidder has stepped forward.
Wed June 19, 2019 – No NCR deal long-term positive – Morgan Stanley
Morgan Stanley comments on yesterday’s New York Post report that Apollo Global Management and Warburg Pincus walked away from NCR acquisition talks…. The firm says the lack of deal indicates NCR is committed to its long-term strategy instead of the “smaller but quicker return” of a sale…. Morgan Stanley stays at an Equal-Weight rating with a $28 price target.
My take is, all of the above activity would have been driven by Blackstone attempting to exit its balance share holding of NCR preference shares. The price any party would be prepared to pay would have been heavily influenced by the prevailing common stock share price. Unlike in early 2017, the share price in 2019 did not increase to anywhere near the required level for a satisfactory exit by Blackstone. I believe it is now back to the drawing board. Blackstone will continue to work with NCR to achieve a satisfactory exit at some future date. NCR has already announced the next step in its transformation strategy, as reported by Seeking Alpha.
Tue July 2, 2019 – NCR purchases D3 Technology
NCR acquired the online and mobile banking company for undisclosed terms to expand NCR Digital Banking into new market segments….NCR expects the transaction to be slightly dilutive to EPS in the first year.
NCR – What Now?
As reported above, Morgan Stanley have a price target of $28. I expect the share price to fall to that level and possibly much lower. I believe Blackstone will definitely again attempt an exit of their remaining preference shareholding. However, the timing is uncertain, and it may be a considerable time period away. An opportunistic entry, well below $30, would possibly provide an opportunity to exit well above $30, at some future point in time, when Blackstone again attempt to sell the balance of their preference shares. I provide additional background information below.
NCR’s Continuing Transformation
NCR’s legacy ATM business is in decline, as detailed in my article, “NCR: The ATM Market Is In Structural Decline, As We Move To A Cashless Society“. NCR is seeking to transform its business away from reliance on ATM’s and other legacy business. Towards this end, NCR 2019 guidance, per Figure 1 below, revealed plans to increase expenditure on mergers and acquisitions.
Source: NCR SEC filing
The $206 million for FY 2018 mergers and acquisitions is primarily attributable to the $195 million paid in cash for JetPay. JetPay was acquired to expand offerings to include end-to-end payment offerings, unlocking incremental recurring revenue streams (see here, and here). The $300-$400 million guided for FY 2019 mergers and acquisitions will likely all be required for the recently announced D3 Technology acquisition. In its press release of July 2, 2019, NCR stated,
…the company has acquired D3 Technology, Inc., a leading provider of online and mobile banking for the Large Financial Institution (LFI) market. Adding D3 immediately expands NCR Digital Banking into new market segments, including U.S. large banks and over time, international banks…. The expansion of NCR’s digital banking solution portfolio means that in addition to delivering one of the industry’s strongest solutions in the cloud for the Community Financial Institution (CFI) market, it can now provide a leading on-premise solution built for the needs of LFIs…. NCR is a leading provider of digital banking solutions for financial institutions. D3 accelerates NCR’s Digital First Banking strategy, which includes integration of the customer experience across all self-service channels such as online and mobile banking, ATMs, Interactive Teller Machines and other Banking software solutions, complemented by NCR’s consulting, advisory and support services.
This seems like a very positive move for NCR, the company. But as stated above, the preference share arrangements and the company’s past actions have not favored the common shareholders.
The Blackstone/NCR Arrangements
Blackstone was brought in by NCR in December 2015, as an experienced technology investor to add value to and accelerate NCR’s strategic transformation to an integrated software & services company. This aspect of the deal appears to be working well as NCR continues to achieve a necessary transformation. As part of the deal, Blackstone was issued with $820 million of Series A Preferred Convertible Shares with a 5.5% coupon and NCR used the proceeds plus its own cash to repurchase $1 billion of common stock. The Preferred Convertible shares are each equivalent to 33.33 common stock shares and are convertible at $30 per common stock share. The focus was to be on growing recurring revenue, optimizing manufacturing and supply chains, expanding partnership network, and rationalizing costs. After 4 plus years with Blackstone on board, and no dividends for ordinary shareholders, financial engineering has ensured no growth in retained earnings attributable to common stock shareholders that could be used for future dividends to common stock shareholders. The NCR Board’s policies, to repurchase common stock shares and not pay dividends to common stock shareholders, effectively allow Blackstone and other preferred stockholders to increase their proportionate share of equity. Blackstone did well from a public offering of 49% of its Series A shares in March 2017 at the same time as there was a sharp spike in common stock share prices that was not sustained. Ordinary (common stock) shareholders who took advantage of the $350MM share repurchase in first quarter 2017, also did well from the spike in the share price to ~$46. Ordinary shareholders had a further opportunity to exit in 1st quarter 2018 when the company repurchased $165M of shares at an average price of $35.11. The company and remaining ordinary shareholders have not fared so well. Repurchasing common stock, particularly at an excessively high price, rather than reducing NCR’s borrowings, advantages the preferred stock holders, while significantly increasing risk for ordinary shareholders. TABLE 1 below shows the movements in Series A, common stock shares, and total equivalent common stock shares, during the 3 plus years so far of the Blackstone arrangements.
TABLE 1 shows, immediately after issue of the Series A preferred convertible shares to Blackstone and prior to repurchase of ordinary shares with the net proceeds of $794MM, ordinary shareholders owned 83.44% of the company on a fully diluted basis. Following the repurchase of ordinary shares in December 2015, Blackstone’s share of the company increased from 14.04% to 16.16%, and ordinary shareholders share reduced from 83.44% to 80.83%. Since the end of December 2015, a further $810MM of share repurchases have been made through 1st quarter 2019, together with 5.5% preference dividends paid in shares to Blackstone, and the company has bought back ~10% of the outstanding Series A shares from Blackstone at $48.47 per ordinary share equivalent (issue price $30 equivalent resulting in a $18.47 profit plus dividends for Blackstone). After all these transactions, including $810MM of ordinary shareholder funds for share repurchases, the Series A share of the company has increased from 16.16% to 19.02% while the ordinary shareholders’ share of equity has reduced from 80.83% to 78.38%.
Opportunity In Adversity For Savvy Shareholders
While the story so far might not sound encouraging, the fact is NCR is a powerful cash generator which has enabled it to buy back $810MM of its shares over the past 3 plus years, without increasing debt. Blackstone will not stay on board forever and, at some point, will seek an opportunistic exit for its remaining ~48% of its original investment. There is a possibility that savvy shareholders could effectively hitch a ride on Blackstone’s coat tails and exit at the same time at attractive share prices. Figure 2 below, a YChart with added commentary, reflects Blackstone’s sale of ~49% of its Series A preferred shares in a public offering in early 2017.
From the notations, it can be seen NCR made a $350MM share repurchase in 1st quarter 2017. Of this $350MM, $145MM was for purchase of converted shares from Blackstone at $48.47 per share, and the balance $205MM at $46.49 per share from common stock shareholders. Blackstone Series A shares were still locked up at the time, and they needed special approval of the NCR board to sell the 49% of their holdings at that time. The Series A shares are no longer locked up and NCR still has continuing cash generating capacity to make further significant share repurchases. Figure 3 below shows the apparent effect on share price in 1st quarter 2018 of share repurchases.
From 4th quarter 2017 conference call in answer to a question, from Ian Zaffino, about the possibility of Blackstone exiting more of their position. Bob Fishman (NCR Co) responded –
Yeah. On the Blackstone, I mean we can’t speak for Blackstone. They’re a large investor of ours. They will make their own decisions.
Figure 1 appears to indicate some unknown factor was causing the share price to spike towards $54, coincidentally around the time Blackstone was making a public offer of 49% of its Series A shares in mid-2017. The question is, could history repeat itself enabling savvy ordinary shareholders to exit at a high share price? I believe the recent failed attempted trade sale of NCR was driven by Blackstone’s desire to exit its remaining preference shareholding. The share price has not had the support of NCR repurchasing shares in FY 2019. Figure 4 below shows how the share price came nowhere near the 2017 levels per Figure 2 above, making it unattractive for Blackstone to exit at this time.
Summarizing The NCR Share Gain Opportunity
Blackstone will inevitability seek to exit the balance of their investment in NCR preference shares. At that time, it is likely the share price will again rise to the mid-30s. The share price must go much higher, if Blackstone is to achieve their investment objectives. With a 5.5% annual dividend Blackstone can afford to wait. If the ordinary share price falls below $25, as it did in December 2018, then a purchase of NCR ordinary shares could provide a means of achieving a sizeable speculative gain. Some patience would likely be required, based on the indication the D3 Technology acquisition is expected to be slightly dilutive to EPS in the first year.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment advisor and/or a tax advisor as to the suitability of such investments for their specific situation. Neither information nor any opinion expressed in this article constitutes a solicitation, an offer, or a recommendation to buy, sell, or dispose of any investment, or to provide any investment advice or service. An opinion in this article can change at any time without notice.