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Is Xerox (XRX) in Trouble for Terminating Fujifilm Deal?

Zacks Equity Research
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Per a Reuters report, Xerox Corporation XRX might be charged a fine of more than $1 billion by FUJIFILM Holdings Corporation (“Fujifilm”) for ending the previously announced merger with Fuji Xerox and inking a new deal with its two activist investors —Carl Icahn and Darwin Deason.

Fuji Xerox Co., Ltd. (“Fuji Xerox”) is a joint venture between Xerox and Fujifilm, wherein the latter holds a 75% interest and Xerox holds the remaining 25% stake. Carl Icahn and Darwin Deason are two of Xerox’s investors who together hold a 15% ownership stake in Xerox

Fujifilm has accused Xerox of violating the contract, thereby bowing to the pressure from Icahn and Deason. The lawsuit, filed in theU.S. District Court in Manhattan, also calls for a merger termination fee of $183 million, per the report.

Following this news, share price of Xerox fell 0.6% to $27.24 per share on Jun 18. Moreover, a glimpse at Xerox’s price trend reveals that the stock has had a disappointing run on the bourse lately. Shares of Xerox have declined 6.6% against the industry’s gain of 4.6% year to date.


Course of Events

On Jan 31, 2018, Xerox and Fujifilm inked a definitive deal worth $6.1 billion to combine the Fuji Xerox joint venture with Xerox. Per the deal, Fujifilm would own 50.1% of the combined company. However, the company’s decision was challenged by its two largest shareholders who not only claimed the Fujifilm deal to be undervalued but also demanded the resignation of the then CEO.

In April, the two investors won a court case and succeeded in temporarily blocking the Fujifilm deal. On May 13, Xeroxended the proposed merger with Fuji Xerox due to delay in the delivery of audited financials of Fuji Xerox within the stipulated date of Apr 15. The company also noted discrepancies in the audited and unaudited financial statements of Fuji Xerox.

Additionally, Xerox inked a new deal with Icahn and Deason and madechangesto the board of directors. Five new members namely Jonathan Christodoro, Keith Cozza, Nicholas Graziano, Scott Letier and John Visentin were appointed, replacing Robert J. Keegan, Charles Prince, Ann N. Reese, William Curt Hunter and Stephen H. Rusckowski. Gregory Brown, Joseph Echevarria, Cheryl Krongard and Sara Martinez Tucker continue to serve as members of Xerox’s board.

On May 16, John Visentin was appointed as the chief executive officer (CEO) of Xerox, replacing Jeff Jacobson. Visentin was also elected as Vice Chairman of the company’s board of directors. Keith Cozza became the new chairman of Xerox’s board of directors. The company’s 2018 annual shareholders’ meeting is scheduled on Jul 31.

In view of the latest development, we expect investor focus to remain on the burning issue.

Zacks Rank & Stocks to Consider

Currently, Xerox is a Zacks Rank #2 (Buy) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the broader Business Services sector include Mastercard Incorporated MA, FLEETCOR Technologies, Inc. FLT and WEX Inc. WEX. While Mastercard carries a Zacks Rank #1, FLEETCOR and WEX sport a Zacks Rank #2.

The long-term expected earnings per share (three to five years) growth rate for Mastercard, FLEETCOR Technologies and WEX is 19%, 16.5% and 14.3%, respectively.

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