NCR opts for split, Adobe’s rather lofty Figma valuation, DoJ sues to block Spectrum Brands’ HHI sale

News Analysis 16 September

NCR opts for split, Adobe’s rather lofty Figma valuation, DoJ sues to block Spectrum Brands’ HHI sale

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Names discussed: NCR, ADBE, SPB

NCR to separate into an ATM business and a digital commerce business

Despite the attempt to deliver a review that shareholders were happy with, NCR [NYSE:NCR] has once again disappointed. Last evening the Atlanta-based fintech company announced plans to separate into two companies – ending hopes of a sale for now.

NCR embarked on its latest strategic review earlier this year. And while shareholders may have been happy to hear CEO Michael Hayford essentially rule out another PIPE-style deal like the agreement NCR struck with Blackstone [NYSE:BX] back in 2015, a rough 1Q22 earnings report back in April looked to make a wholeco sale an uphill battle.

NCR now plans to separate into two companies: an ATM business and a digital commerce business. While investors are likely to be underwhelmed by the announcement, that’s not to say there wasn’t interest in the company. This news service reported in August that Veritas was engaging with direct lenders to help finance an offer amid choppy financing markets.

NCR confirmed as much in yesterday’s release, mentioning “material interest in a whole company sale of NCR, as well as interest in various individual segments of our business.” However, it seems that the condition of funding markets became too high a hurdle as NCR blamed “the state of current financing markets” for an inability to deliver appropriate value to shareholders.

Shares of NCR are down over 14% on the news, trading around USD 25. That’s about 35% below where the stock was trading just prior to announcing the strategic review, as the company battles ongoing global headwinds.

The separation is currently targeted for the end of 2023, so there is still plenty of time to re-evaluate options, especially if the financing markets firm up.

A big test for the Biden Administration's antitrust hardliners may have emerged yesterday.

Adobe [NASDAQ:ADBE] announced the largest acquisition in its history Thursday morning with the USD 20bn takeover of collaboration software firm Figma. Per the terms, ADBE will dole out that 20bn offer half in cash and half in stock, with six million RSUs granted to Figma's CEO and its employees. 

The valuation immediately raises questions about ADBE's rationale for the deal. Figma was valued at USD 10bn in a funding round last year, a quintupling of its valuation from the year prior. ADBE has now doubled that figure in a year in which shares across the tech sector have collapsed. 

That leads us to wonder if ADBE's takeover of Figma is defensive in nature. On yesterday's 3Q22 earnings call, analysts peppered management with questions about what a Figma takeover would mean for ADBE's existing products like InDesign and XD. Jefferies analyst Brent Thill asked directly: "If you think about the last few years, you have always said XD would carry you, what happened with XD?"

ADBE CEO Shantanu Narayen had little to say about XD in response, noting that Figma addresses "a much newer market that emerged." Figma's own website includes a page listing how its own product is a superior collaboration tool to ADBE's XD. It’s also worth mentioning that Microsoft’s [NASDAQ:MSFT] increasing use of Figma over XD was reportedly causing tension between the company and ADBE, according to CNBC. 

The companies are guiding for a close in the very specific timeframe of "in 2023." A look at the merger agreement shows that ADBE is giving itself plenty of time to work through an antitrust review, setting an initial outside date of 15 September 2023, which can be extended to December, and again to March 2024. Should the deal get blocked, ADBE is on the hook for a termination fee of USD 1bn to Figma, equal to 5% of deal value, and on the higher range of your typical break fee.

Antitrust enforcers already have big tech players like, Meta [NASDAQ:META], Alphabet [NASDAQ:GOOG], and Amazon [NASDAQ:AMZN] in their crosshairs. It wouldn't surprise us now to see ADBE with a target on its back as it tries to acquire one of its more threatening competitors. ADBE shares fell 16% yesterday and are down another 2% in pre-market trading. 

SPB/ASSA-B committed to litigation

The Department of Justice has shut the door on Spectrum Brands’ [NYSE:SPB] proposed sale of its hardware & home improvement (HHI) segment. Yesterday, the DoJ sued to block SPB’s deal to sell the business to Sweden’s ASSA ABLOY [STO:ASSA-B], alleging the combination would combine two of the top three competitors in residential door hardware.

SPB struck the USD 4.3bn agreement a year ago. The price tag valued the business at about 14x FY21 EBITDA – well above the roughly 8x multiple that SPB was trading at, leading shares to rally substantially on the news. However, the deal hit its first speedbump this past July.

Not long after the 8 June end date was automatically extended to 8 December 2022 in accordance with the agreement, the two sides opted to extend the agreement even further, fixing a new end date of 30 June 2023.

It seems that the parties underestimated the pushback on antitrust. As the Flash noted, ASSA’s initial deal announcement guided for a Q421 close, so with an automatic extension to 4Q22 apparently still not enough time, it appeared the transaction was much further from the finish line than thought.

Following the news yesterday, both companies released statements challenging the DoJ’s characterization of the transaction and vowing to defend it, noting both parties are “committed to completing the transaction and are confident that they will prevail in litigation.”

SPB CEO David Maura said that both companies “made numerous proposals to address the DOJ’s concerns, each of which were rejected without a valid basis.”

Shares of SPB closed over 16% lower yesterday, wiping USD 389m off its market cap. The stock has taken another leg down in premarket trading, bringing shares to 50% below where they were trading a year ago.