Xerox (XRX) Split Adds Value Immediately - Piper Jaffray

Piper Jaffray analyst, George Tong, introduced estimates for Xerox's (NYSE: XRX) separate entities.anticipating the pending tax-free split of Xerox into separate services and hardware companies. The sum-of-the-parts values services at 10.0x 2017 EBITDA and technology valued at 5.0x 2017 EBITDA for a combined valuation of $14. The analyst keeps his Overweight rating but raises his PT to $14 from $13.

Ahead of Xerox's SEC Form 10 filing containing financial details of the separate services and hardware businesses, the analyst is introducing pro forma estimates for the split company in an effort to enhance financial visibility. He estimates the services entity delivers 2017 EBITDA margins of 16.2%, while the hardware entity yields margins of 19.5%. He expects XRX's split to result in cost dissynergies of potentially $150M due to extra overhead costs. Notably, cost dis-synergies should be well below the $350M in cost savings achieved from the 2010 ACS acquisition due to opportunity for zero-based budgeting, efficiencies achieved since the acquisition, and a slimmer services business post the ITO divestiture.

At valuation multiples of 10.0x 2017 EV/EBITDA for services (up from 9.5x due to peer appreciation) and 5.0x for hardware, consistent with comps, the services business should be valued at $8.16/shr, while the hardware business should be valued at $5.54/shr, for a combined valuation of ~$14/shr.

For an analyst ratings summary and ratings history on Xerox click here. For more ratings news on Xerox click here.

Shares of Xerox closed at $10.98 yesterday.

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