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Seagate's (STX) Subsidiary Commences Cash Tender Offers

Zacks Equity Research

Seagate Technology plc STX subsidiary Seagate HDD Cayman recently commenced three offers (each, an “Offer”) to reduce refinancing risk.

The Offers comprise purchase for cash of aggregate principal amounts of up to $250 million of its 4.250% Senior Notes slated to mature in 2022, $200 million of its 4.750% Senior Notes slated to mature in 2023 and $75 million of its 4.750% Senior Notes slated to mature in 2025 (collectively, the “Notes”).

Seagate HDD Cayman has commenced the cash tender Offers with an aim to trim down refinancing risk via “refinancing portion” of its outstanding Notes with term debt slated to mature later.

Seagate HDD Cayman anticipates utilizing borrowings and cash on hand under a new-term loan in accordance with an “amendment” to its current credit agreement.

Coming to price performance, shares of Seagate have returned 32.2% year to date outperforming the industry’s rally of 9.7%.

Into the Headlines

Each Offer is set to expire at midnight, NY time, on Sep 30, 2019, unless extended or terminated earlier. The deadline for withdrawal and early tender is 5:00 p.m., NY time, on Sep 16, 2019.

Per the announcement, Seagate HDD Cayman will pay to each holder of Notes, with a valid tender at or before early tender time limit, “Total Consideration” including an early tender premium (per $1000 principal amount) of $30 in accordance with the Offer, as applicable.

Coming to holders with valid tender of their Notes post the early tender limit but on or before the expiration time will receive the “Tender Offer Consideration”, which is equivalent to “Total Consideration” less the early tender premium, as applicable.

Morgan Stanley and BofA Merrill Lynch are acting as dealer managers for the tender Offers.

Notes of each series tendered validly and not validly withdrawn on or before early tender time limit will be considered for purchase preferably over Notes of respective series tendered validly post the early tender time limit. In case an Offer is completely subscribed on or before the early tender time limit, holders who validly tender Notes of that series post the early tender deadline “will not have any of these Notes accepted for purchase.”

Seagate HDD Cayman holds the absolute right to make amends to the Offers, deadlines, Tender Caps, subject to applicable laws.

Analyzing Cash Position

As of Jun 28, 2019, cash and cash equivalents were $2.22 billion up from $1.39 billion, reported at the end of the previous quarter. Seagate ended the last-reported quarter with a long-term debt (including current portion) of $4.25 billion down from $4.52 billion reported in the previous quarter.

The latest debt-restructuring initiatives with cash tender offers are expected to aid its subsidiary company to manage debt well.

Seagate’s cash flow and free cash flow generation bode well. Notably, in the fourth quarter, cash from operations was $448 million, up from $438 million reported in the previous quarter. Free cash flow for the quarter amounted to $297 million, up from $291 million reported in the prior quarter.

Moreover, the company returns free cash flow in the form of share repurchases and dividends, which augurs well for the bottom line. In the fourth quarter, the company repurchased 7.8 million shares worth $350 million. At the end of the quarter, the company had $2.2 billion remaining under the share repurchase authorization. Notably, Seagate’s board of directors approved a cash dividend of 63 cents per share payable Oct 9, 2019.

To Conclude

Seagate is benefiting from increasing traction for mass storage solutions across its edge and enterprise end markets. Moreover, synergies from acquisitions and product innovations remain a tailwind.

However, stiff competition in the disk drive market from Western Digital WDC and drastic pricing pressure owing to supply/demand volatility remain headwinds.

Zacks Rank & Key Picks

Seagate has a Zacks Rank #3 (Hold).

A couple of better-ranked stocks in the broader technology sector are Fortinet FTNT and Anixter International AXE, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Fortinet and Anixter is currently pegged at 15.5% and 8%, respectively.

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