Tech Data Skips From Underperform To A Buy Rating At CLSA On Avnet Deal

The $2.6 billion acquisition of Avnet, Inc. AVT's technology solutions business earns an upgrade for Tech Data Corp TECD from CLSA to Buy from Underperform.

The deal, which will give Tech Data a business generating $9 billion in revenue and $300 million operating profit, is expected to be significantly accretive to Tech Data's non-GAAP earnings per share in the first year after closing.

The new TECD will have $35 billion in revenue with distribution in high-value data center accounting for 45 percent of the revenue mix versus 29 percent before.

Related Link: CLSA Ponders What Avnet Will Do With Cash From Tech Data Deal

Tech Data expects to save about $100 million a year within two years after closing, driven by efficiencies related to technology platforms, as well as duplicative functions and corporate expenses.

Lead analyst Louis Miscioscia raised the price target on Tech Data shares to $102 from $76, terming the deal as "massively accretive."

"In comparison to AVT's main competitor Arrow, Avnet has struggled in its TS operation. That is unlikely to change near term, but for TD, given cash on hand, synergies, tax benefits, TS's $300 million of OI, and the low cost of interest 4–5 percent, the deal is massively accretive," Miscioscia wrote in a note.

The analyst expects FY18 post close EPS of $9.25, 50 percent above its prior forecast, and projects EPS of $12 two years out. The analyst expects the share count to increase 10 percent with 2.785 million shares being part of the deal, which is expected to close by June 2017.

However, the analyst noted that the cannibalization of cloud is a long-term concern for this business.

At time of writing, Tech Data was up 3.55 percent on the day, trading at $87.81.

Full ratings data available on Benzinga Pro.