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Xerox deal raises concern about financial impact on Fujifilm

Shrinking market for office equipment and US group's debt levels under scrutiny

Fujifilm firstlaunched a joint venture with Xerox in 1962   © Reuters

TOKYO --Fujifilm Holdings' deal to take control of Xerox, its long-term U.S. partner, has raised worries about the potential financial impact for the Japanese company.

Under the agreement, announced last week, the U.S. copier maker will be combined with Fuji Xerox, the joint venture currently operated by the two groups, giving Fujifilm a majority stake in the merged entity and integrating their office equipment operations. The move, which in effect brings the fall of a U.S. corporate icon, comes more than half a century after the two companies launched their joint venture, in 1962.

Analysts have voiced concern about the deal, with Xerox struggling against falling revenues in a shrinking market for office equipment and facing increasing competition from Japan's Canon and Ricoh.

Before the acquisition, the company had been facing calls from some major shareholders, including Carl Icahn, the well-know US activist investor, for its top management to resign.

Xerox's levels of interest-bearing debt are a particular area of focus, standing at $5.5bn at the end of 2017. This figure has fallen by around 30% from three years earlier, but profits have been dropping even faster, with consolidated operating profit halving to $5.7 billion over the same period.

Fujifilm will borrow $2.85 billion in loans for the deal and pay special dividends to existing Xerox shareholders. Interest payments for the Japanese group are expected to increase now that U.S. long-term interest rates are showing an upward trend.

On Feb. 1, the day after the deal was announced, ratings agency Moody's said it had placed Fujifilm's A1 debt rating under review for possible downgrade. Takashi Akimoto, a Moody's assistant vice president and analyst, said the action was necessary because Xerox's debt would adversely affect Fujifilm's financial position on a temporary basis following the acquisition.

Before the announcement of the deal, Moody's Investors Service had assigned a debt issuer rating of Baa3, the lowest rating of investment grade, to Xerox. The outlook assigned by the major U.S. credit-rating agency was "negative."

In a saturated global market for office equipment, companies in the sector are being forced into change, seeking opportunities in consumable supplies and maintenance services.

Ricoh, for example, has been restructuring its operations and has a total asset turnover ratio -- a measure of how efficiently a company uses its assets to make money -- of 0.81, compared with Xerox's 0.6 (a higher ratio is considered a better use of assets). The existing Fuji Xerox joint venture has a ratio of around 1, but this is likely to be pulled down by Xerox after the Fujifilm deal.

The takeover of Xerox will raise the ratio of office equipment to Fujifilm's total sales to almost 70% from nearly 50% at present. Assuming that office equipment-related sales will decrease 2% to 3% annually Fujifilm's return on equity, which currently stands at the 6% level based on the simple combination of that of the company and Xerox, would fall to 5% in fiscal 2020 if its restructuring plan fails to advance, according to an analyst at a brokerage house. Central to that restructuring will be a workforce cut of 10,000.

For fiscal 2017, Fujifilm expects to set an all-time high in group net profit for the fourth consecutive year on strong sales of digital cameras and other products.

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