Sometimes, organic growth just takes a little too long, or costs a little too much. NCR (NYSE:NCR), a maker of a variety of ATMs, self-service kiosks and point-of-sale terminals, announced that it has reached a deal to acquire Radiant Systems (Nasdaq:RADS) in an all-cash deal. Assuming this deal goes through to completion, NCR will significantly bolster its hospitality market presence and give it a third major industry group alongside finance and retail.
TUTORIAL: Mergers And Acquisitions
NCR announced that it will be acquiring Radiant Systems in a cash deal that values Radiant at $28 per share - about a 30% premium for Radiant shareholders. At a deal value of $1.2 billion, Radiant is going out for a little bit more than three times the forward revenue estimate and a trailing EV/EBITDA ratio around 15. That's a pretty healthy valuation, relative to Radiant's historical multiples, not to mention its likely forward free cash flow. (For related reading, see Taking Stock Of Discounted Cash Flow.)
What NCR's Getting
In buying Radiant, NCR is expanding its presence in the hospitality sector. While Radiant gets a large percentage of its revenue from the U.S., it is nevertheless a leading player in hospitality, with over 100,000 installations around the world. Radiant does have relationships in retail and entertainment, with companies like Kroger (NYSE:KR) and Live Nation (NYSE:LYV), but the real strength of the company is in its restaurant business with clients like Chipotle (NYSE:CMG), P.F. Chang (Nasdaq:PFCB) and Brinker (NYSE:EAT).
Even if Radiant is number one in the field, that is only worth market share around 6%. It's a competitive industry, with companies like IBM (NYSE:IBM), Dell (Nasdaq:DELL) and PAR Technology (NYSE:PAR) offering their own hardware and software products. Still, the combination of NCR's hardware and RADS systems could be a productive one, and NCR may be able to get more than just a simple "1+1" benefit by tacking on Radiant's business. (What's the best indicator of a company's future success? For more, see Competitive Advantage Counts.)
Automation Doesn't Always Progress Evenly
NCR could probably use some diversification and some renewed momentum right about now. While there are upgrade cycles in the ATM business (and NCR holds its own against the likes of Diebold (NYSE:DBD) and Wincor), banks are not especially eager right now to install new machines or launch any significant upgrades, and the opportunities for new placements are pretty limited.
What's worse, there seems to be a little rumbling out there about rolling back the self-service kiosks at retailers. Albertsons LLC, (not the Albertson's that is part of SuperValu (NYSE:SVU)) is reportedly removing the kiosks from all stores, and Kroger is supposedly considering it. While some shoppers love them, others hate them and NCR may have to work a little harder to improve its offerings and convince stores to keep them.
At the same time, though, it looks like self-service automation is here to stay on the bigger scale. How many people have dealt with a bank teller in the last month? Airlines have pushed more and more functions on to their self-service kiosks, and DVD kiosks like those offered by Coinstar (Nasdaq:CSTR) are relatively popular.
The Bottom Line
NCR is arguably paying up for Radiant, but it will boost revenue and profits and the additional market exposure is a certainly a plus. NCR shares would be interesting on a pullback, but Radiant shareholders should probably not expect a counter-bid. (For related reading, see Connecting Crashes, Corrections And Capitulation.)
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