The decision to increase its holding in Datatec to 20% in May meant the Public Investment Corporation was one of the biggest gainers from Tuesday’s Datatec share price surge.
The IT company announced the sale of its Westcon Americas business in a shares-and-cash deal worth about R10.2bn — or 85% of its market cap.
US Fortune 500 IT company Synnex will pay a maximum of $800m, of which $500m will be settled in Synnex shares, giving Datatec a 10.25% share. Synnex has also agreed to buy up to 20% of the remaining Westcon business, Westcon International, for $60m.
News of the Westcon Americas sale initially drove Datatec shares 26% higher, but the stock sold off during the day to close 10.5% higher.
Westcon deals in technology distribution and is Datatec’s biggest revenue spinner but has been a drag on earnings of late. Its contribution to profit fell to 40% in the year to February, from 52% in 2016.
The CEO of Datatec, Jens Montanana, said his group had spent about four years repositioning itself so that services became the primary business of the group.
“The ITC world is moving towards being service-focused. As such we have shifted our strategy so that Logicalis, which has been performing very well lately, accounts for more than half of our earnings,” he said.
Montanana, who will join the Synnex board, described the two tech companies as “highly complementary”.
While Synnex has the option to settle in cash in the event that there is a substantial rally in its stock, analysts said the exchange of shares made better sense for Datatec as it would benefit from synergies.
Founded in 1980, Synnex has a market cap of about $4.4bn. Analysts have the share on a 12-month forecast of $124 from the ruling $113.
Aslam Dalvi, portfolio manager at Kagiso Asset Management, which owned 3.5% of Datatec, said Synnex had been gaining market share in the US.
Avior analyst Roelof Brand, who had a market perform rating on Datatec, said it got a “good price” for Westcon Americas, though he said Westcon International “is worth more than what is implied”.
Datatec is not keen to sell the balance of the Westcon International business just yet, given the dent in earnings caused by the roll-out of a SAP ERP system and business-process outsourcing in Europe, the Middle East and Africa.
Brand said the deal with Synnex was “a step in the right direction”, but achieving normalised earnings in Westcon International was “still key to any further valuation uplift”.
Montanana said, however, that the deal would help Westcon International complete its transformation process and that its businesses in Africa and Asia would turn a corner soon.
After the announcement, Datatec shares were up 26% to R64.49 in early trade on the JSE, valuing the company at R13.5bn
Westcon Americas constituted 48% of Westcon-Comstor’s global revenue in the 2017 financial year, with the balance coming from Westcon International.