Tech Data Corp (TECD - Analyst Report) is increasing its exposure in the UK, France and the Netherlands through the acquisitions of some distribution companies of Specialist Distribution Group (“SDG”) for $350 million. SDG is the distribution division of UK-based IT services company Specialist Computer Holdings (“SCH”).
Tech Data will be acquiring shares of SDG, IQ Sys and ISI Distribution in the UK, ETC and Best'Ware in France and ETC in the Netherlands. The transaction is expected to be completed in the fiscal fourth quarter of 2013.
Upon getting the required approval from the European Union regulatory authorities relating to the acquisitions, Tech Data would gain control of the aforementioned distribution companies. The acquisitions would not only increase Tech Data’s exposure in Europe, but revenues from these acquired companies would add to its top line (approximately $500 million annually).
Moreover, the acquisitions would reinforce the company’s enterprise business, Azlan, by adding a range of offerings such as data center, enterprise software and broadline products (PC and peripherals). The company’s customer base will also increase.
Tech Data is focused on diversifying its operations in Europe, as it faces stiff competition in the domestic market from Ingram Micro Inc. (IM - Analyst Report) and SYNNEX Corp. (SNX - Snapshot Report).
Tech Data generates the majority of its sales from European countries (approximately 60% of total sales). Gartner expects IT spending in Central and Eastern Europe to be positive, which is expected to garner nearly $158 billion in 2012. Thus, these acquisitions by Tech Data will help the company grab a share of this billion dollar opportunity.
However, sales from the European region dropped 5% year over year in the recently concluded quarter where macro concerns continue to weigh on IT investments.
Other than the volatile European market, there is also a lack of visibility in government spending in the U.S. Sluggish PC shipments are also expected to hurt Tech Data’s top-line.
We believe that Tech Data’s strategy of shifting resources from lower-performing regions to higher-growth regions, cost reductions (shutting down business in the loss-making Brazilian and Colombian units) and accretive acquisitions (14 acquisitions added $1.5 billion in sales over the last four years) will drive growth over the long term.
Moreover, we believe that Tech Data is well positioned to achieve strong top-line and bottom-line growth over the long term, as information technology (IT) spending picks up and its new technologies start contributing.
Thus, we maintain our long-term Neutral recommendation on the stock. Currently, the stock has a Zacks #3 Rank, implying a short-term Hold rating.