Seagate Buyout Falls Apart in Favor of Buyback Plan

A potential $9 billion buyout of Seagate Technology fell apart Monday, and the hard disk maker will instead move ahead with a share buyback plan, Reuters reported. Seagate had been the target of private equity firm TPG Capital, Reuters said. The firm, however, backed away after it was unable to sign on another private equity firm to partner in the deal.

(Reuters) – A potential takeover of Seagate Technology Plc (STX.O), which could have been worth about $9 billion, fell apart on Monday and the hard drive disk maker will instead pursue a share buyback plan.

The deal’s collapse shows it remains difficult to strike large buyouts despite an improvement in financing markets since the credit crisis.

While a number of private equity deals have been struck in the past few months, they have typically been $3 billion to $5 billion in size. A number of potentially larger deals, such as Fidelity National Information Services Inc (FIS.N), faltered earlier this year.
Seagate had been pursued by buyout firm TPG Capital [TPG.UL], which was seeking other private equity firms to partner with, several sources familiar with the matter previously said.

However, other firms which might have partnered with TPG lost interest, those sources previously told Reuters. Bain Capital lost interest in the last two weeks, sources previously told Reuters, which followed cooling interest from rival Kohlberg Kravis Roberts & Co (KKR.N).

Seagate said on Monday it had ended talks because “the indications of the valuation range were not in the best interest of the company and its shareholders.”
Its shares, briefly halted after the close, slid 5.5 percent after-hours.
The company instead has won board approval to buy back $2 billion of its own shares.

EQUITY GAP
Bain’s lack of interest left an “equity hole” which needed to be filled, one source familiar with the situation said. The banks that were planning to underwrite a deal were not willing to provide additional funding needed to cover the remaining equity, that source said.

Bain was not immediately available for comment.

Some buyers had been concerned about the prospects for Seagate if new data storage technology, such as flash storage and solid state drives which are faster and more rugged than hard drives, makes its products redundant.

They were particularly worried about the arrival of Internet-based cloud computing, which promises to allow users to store information in a shared system, accessible from any device. This system is replacing hard drives built into personal computers, which some sources have described as antiquated.

However, some analysts were optimistic about Seagate’s current prospects.

“They (Seagate) can survive on their own (without a buyout) and the fundamentals are starting to improve,” said Kaushik Roy, an analyst with Wedbush Securities.

Roy said that Seagate has seen pricing for hard drives stabilize compared to the last two quarters.

Seagate originally said in October it had received preliminary interest about a buyout. The company has not identified which parties it had held talks with.

“Our dialogues with them were extensive and thoughtful,” said Chief Executive Steve Luczo. “However, management and the board have chosen to cease discussions concerning a private equity-led leveraged buyout.”

Seagate, which had a market capitalization of $6.6 billion as of Friday’s market close of $13.89, could have been valued as high as $9 billion according to the $16-$19 per share price range that had been discussed, sources familiar with the matter previously told Reuters. That would have been the biggest leveraged buyout so far this year in the United States.

A number of large buyouts mulled this year have not happened. A Blackstone-led group considered buying Fidelity National Information Services Inc (FIS.N) in May for about $15 billion, but pulled out because of disagreement over price.

However, there has been a small spate of tech-related deals. Private equity firm Carlyle Group in October struck a $2.9 billion deal to buy communications cable maker CommScope Inc (CTV.N) and another deal to buy telecoms company Syniverse Technologies (SVR.N) for more than $2 billion.

Scotts Valley, California-based Seagate generated revenue of $11.4 billion in the fiscal year ended July 2 and net income of $1.6 billion, the company said in regulatory filings.

Seagate was eclipsed by Western Digital Corp (WDC.N) earlier this year for the lead in overall unit shipments, but it remains the industry leader in revenue.

The company has about a 30 percent share of the total hard-drive market, while in the enterprise segment, which provides hard-drives for business data storage and has relatively high margins, Seagate enjoys about a 60 percent market share, analysts said.

By Nadia Damouni and Megan Davies
(Additional reporting by Alex Dobuzinskis in Santa Ana; Editing by Gunna Dickson and Richard Chang, Phil Berlowitz)