Earlier this morning, electronics distributor Bell Microproducts (BELM) announced they had agreed to a buyout proposal from Phoenix-based Avnet, a larger competitor in their industry. Bell shares are up 28% on the news, and Avnet's shares are up 6.2% on a well-received acquisition, in addition to a boost to this quarter's earnings guidance.
From the release:
Bell Microproducts Inc. (Bell also updated guidance for the current quarter, noting that a product mix-shift will hurt gross margins.
Nasdaq:BELM - News) ("Bell") announced today that it has entered into a definitive agreement to be acquired by Avnet, Inc. ("Avnet") in an all cash merger for $7.00 per share. The total transaction value of approximately $594 million is based upon an equity value of approximately $252 million and a Bell debt position, at face value and net of cash, of $342 million at December 31, 2009.
In 2009, Bell did about $51million in Free Cash Flow, inclusive of $26million in outside legal and accounting fees that will fall sharply in the coming years. This buyout values the company at a Free Cash Flow Yield of 23%, a HUGE number. The reason for this fat yield is the company's enormous debt load of $350million, versus the implied $222million in the equity buyout. Bell's pretax, pre-deprecation interest coverage ratio is less than 2, which is not a comfortable margin. If I owned BELM shares, I would prefer the company "operate" its way out from under this debt load, rather than sell out at these levels. However, such is the risk you run owning shares of a company with a very concentrated ownership structure.
In this buyout, Avnet will strip out costs from Bell's operating structure, and this deal should be HUGELY accretive. They didn't mention the deal's effect on earnings, and sometimes that's out of "respect" for the acquired company's management. As in, if Avnet announced it 's a raging steal of a buyout, then Bell's management will come under fire. Nice work here by Avnet.
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