the "safe" way to take position in this, is with a buy stop at 38 3/8, as the gap will likely fill after it passes that point. Holding firm with current position at 34 7/8
closed 36.25
will most likely gap on open tomorrow morning, barring any horrible "world" news event
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Monday December 28, 3:27 pm Eastern Time
Moody's rates Tech Data Corp notes Ba3
(Press release provided by Moody's Investors Service)
NEW YORK, Dec 28 - Moody's Investors Service assigned a Ba3 rating to Tech Data's $300 million 5% convertible subordinated notes, due 2003, issued to Klockner & Co. AG in July, 1998 as part of the purchase price for an 80% ownership interest in Computer 2000 AG, a leading European distributor of information technology products.
The convertibles, which are subject to redemption at a price of 102 as of July 1, 2001, may be converted at any time into shares of Tech Data common stock at $56.25 per share. The stock has traded recently at $35-36 per share, having dropped precipitously from a previously stabilized $41-43 per share range, in the wake of last week's disappointing earnings previews from competitors within the industry.
At the same time, Moody's raised the rating to Ba1 from Ba2 on Tech Data's guaranteed $550 million multi-currency bank revolving credit facility.
Since the initial acquisition, which also included an additional 3% equity interest obtained from the purchase of stock from an institutional investor, Tech Data has increased its ownership, through open market purchases of Computer 2000 stock, to approximately 97% of the company for an aggregate purchase price of about $500 million.
The company's senior implied rating is Ba1. The ratings outlook is stable.
Moody's ratings and upgrade are based on Tech Data's aggressive, yet conscientious, management team; the very satisfactory return on invested capital recorded by the company on a pro forma basis for the LTM ended October 31, 1998; the company's conservative financial accounting; and the company's demonstrated commitment to a balanced capitalization through the recurrent issuance of equity, despite its dilutive impact on outstanding shares of common stock.
Additionally, Tech Data is unlikely to be as vulnerable as certain competitors to any adjustment in second sourcing of systems purchases as a result of its more limited reliance on large resellers, and the dominance of its sales to those customers in networking and peripherals products.
However, the ratings also reflect the company's rapidly increasing accounts payable as payment terms have not matched the reduction in inventory days brought about by vendors' more stringent price protection policies.
Moody's is concerned that payables outstanding, which have actually been reduced to about 38 days, the company's lowest on record, are being employed as a substitute for borrowed funds as a means of financing inventory, and would be subject to reversal when vendors eventually accelerate their receivables processing.
The ratings also recognize challenges the company will undoubtedly experience assuming control over the geographically decentralized European operations of Computer 2000; pressure on the company's narrow operating margins extending from declining average selling prices of various products and competitive pressures in the United States and Europe; an increase in leverage resulting from the Computer 2000 acquisition; diminished pro forma EBITA and pro forma free cash flow coverages of pro forma fixed charges; and the vulnerability of this market to brief but precipitous sales contractions.
The ratings also take into account the company's ability to adapt to changing vendor strategies to accelerate inventory turnover,
including programs to extend the final assembly of large volumes of systems to the distribution channel and their efforts to replicate the direct sales model pioneered by Dell and Gateway.
Tech Data derives about 23% of its revenues from the sale of personal computer systems.
There exists a possibility that some of this business will be displaced by direct sales undertaken by Compaq Computer, as well as Hewlett-Packard which has just declared its intent to proceed with direct system sales as well.
Initiatives to more effectively operate under vendors' more ambitious price protection arrangements include Tech Data's factory direct shipping operation in which the company has co-located personnel at IBM and Compaq manufacturing facilities in Raleigh, North Carolina and Houston, Texas, respectively, to minimize delivery times; and a nascent configuration effort at the company's Swedesboro, New Jersey and South Bend, Indiana distribution centers.
Ingram Micro has more recently replicated the co-location effort, validating, at least in the near term, Tech Data's strategy.
The ratings are further buttressed by Tech Data's moderate 2.6 times debt to cash flow ratio; the company's 2.6% operating margin in the United States which, while tight, is among the strongest industrywide; the potential for margin improvements in Europe as the company harmonizes the Computer 2000 management information systems with its mainframe controlled operations and collaborates on international purchasing; and the company's solid return on invested capital, based on EBITA plus rents, of 16.9% for the LTM ended October 31, 1998. Return on assets, recognizing the sizable accounts payable employed in the business, was substantially lower at 9.4% for this same period.
Nevertheless, ROA has improved somewhat over the past four quarters. Both the ROI and ROA calculations factor into consideration the capitalization of operating leases. Pro forma EBITA plus rents, adjusting for the Computer 2000 acquisition and sale of Macrotron to Ingram Micro, would have provided 3.4 times coverage of pro forma fixed charges for the LTM ended October 31, 1998.
Pro forma free cash flow coverage, assuming $75 million of capital expenditures, would have been 3.1 times for that same period.
Moody's notes that the rating on the convertibles additionally takes into consideration their structural as well as contractual subordination. Although about $161 million in foreign currency working capital loans remain outstanding at the Computer 2000
subsidiary level, subsidiary borrowing is expressly limited under the amended covenants accompanying the company's multi-currency revolving credit facility to a maximum $300 million senior unsecured indebtedness.
The overall financial strength of the company and the likelihood of the dominant proportion of future financing requirements being met at the Tech Data parent company tier contribute to the standard two-notch differential between the company's senior implied rating and the rating on the subordinated debt.
Tech Data Corporation, headquartered in Clearwater, Florida, is the world's second largest distributor of microcomputer hardware and software products to value-added resellers, corporate resellers, retailers and direct marketers. |
