HNA finally finds a buyer for Ingram Micro

Ingram Micro has finally been sold by its embattled Chinese owners, HNA, to US private equity firm Platinum Equity, in a transaction valued at US$7.2 billion. This will end the long-running saga over Ingram's ownership, assuming the deal closes on schedule in H1 2021. It is a surprisingly positive result for HNA, which bought Ingram for US$6 billion in 2016, and is set to generate a sizeable return in just four years. It is also welcome news for Ingram's suppliers and customers. Ingram has been sold in its entirety, avoiding the need for a complex company break-up and it is back in the hands of US owners, which will be a significant relief for US vendors, channel partners and the US government, as well as providing greater assurances in other key Western markets. In the face of growing tensions between the US and China, Ingram's Chinese ownership was creating additional challenges for US suppliers, for its customers supplying US federal accounts, and even for employees. This will give US-headquartered vendors, in particular, greater confidence to invest with Ingram. It also highlights the power US private equity now holds over global distribution, with the world's top two distributors in the hands of US-owned PE firms.

Ingram price highlights rising value of global distribution

One of the biggest surprises – given the shortage of acquirers – is the high price tag, making it the largest ever IT distribution acquisition, and significantly eclipsing Tech Data's US$6 billion purchase by Apollo earlier in the year. On one hand, this is an endorsement of the value of distribution, which has increased during the COVID-19 crisis. Share prices of distributors around the world are riding at all-time highs. In reality, Platinum is paying less than nine times 2019 operating profits for Ingram, compared to over 10 times profits that Apollo paid for Tech Data. But this is also an important face-saving deal for HNA, and for the Chinese government, which effectively took control of HNA in January (link to report: Chinese state takes control of HNA, owner of Ingram Micro). In the absence of a buyer, it was looking increasingly likely Ingram would be subject to a firesale, or dismantled. In 2018, HNA failed to agree a sale to Apollo Global Management (which then acquired Tech Data for US$6 billion), and in August 2019, RRJ reportedly offered just US$4bn for Ingram, which was rejected.

HNA has now, against the odds, secured a sale price close to the US7.5 billion it was reportedly seeking. The details behind the deal are unlikely to be made public, leaving speculation about the terms of the debt arrangements between the two parties and whether Platinum will see other benefits from its HNA and China government relations.

One disadvantage of the transaction is Ingram's position in China will be weakened. Although Ingram has largely failed to capitalize on the China opportunity under HNA, Platinum may have sought assurances about its continued presence in China. It is also unclear whether HNA maintains any ownership or control in Ingram.

Investment will be a priority

The sale represents a new opportunity for Ingram. While through careful ring-fencing it has managed to successfully limit exposure to HNA's debt challenges, Ingram was hampered in terms of investment capacity. In the last three years it has made only small, selective acquisitions, such as French security distributor Abbakan and IT services provider Ictivity in the Netherlands, but has avoided large scale purchases. Platinum Equity brings substantial investment heft. It is one of the largest US-owned private equity firms, with an asset base worth around US$23 billion and investments across a wide range of industries including manufacturing, consumer goods, healthcare, and (largely non-IT) distributors. It has made several sizeable technology investments over the years, most notably US reseller CompuCom back in 2007, power and cooling vendor Vertiv, and Staples Australia, although Ingram is by far the largest.

The scale of any planned investment is not yet clear, but Platinum is promising to support aggressive growth and transformation, including acquisitions, to expand Ingram's geographic reach and strengthen its momentum in key expansion areas. LATAM and APAC are likely to be regional priorities, and Ingram has recently taken steps to extend its reach in both. Local acquisitions in Latin America could again become a possibility, to expand beyond its current in-country presence in Brazil, Chile, Colombia, Mexico and Peru. In APAC, Ingram will be keen to strengthen its regional position against an enlarged Tech Data, which recently closed the acquisition of Innovix. In EMEA, a strategic goal is to become the region's largest cybersecurity distributor, against stiff competition from Arrow ECS, Exclusive Networks, Tech Data, and a host of local and regional players. An acquisition of an established multi-country specialist, such as Infinigate, Exclusive Networks or Nuvias, would significantly extend its footprint.

But expect Platinum to support big spending in new transformation areas for the business, such as cloud services, advanced solutions, and perhaps most importantly, digital platforms. Close to 90% of Ingram's total revenue is still estimated to come from Technology Solutions (product distribution), and while this has been one of the strongest areas of growth and profitability during the COVID-19 crisis, Platinum will want to speed up Ingram's move into new profit centers. Ingram's services business has been a bright spot during the crisis – its ecommerce fulfilment business has boomed as a result of lockdowns across the globe. The cloud business is one obvious area of attraction for investors, but needs further investment to regain its leadership as rivals like Tech Data and ALSO catch up, or forge ahead. Under PE rival Apollo Global Management, Tech Data has committed to spending US$750 million in digital capabilities, and solutions like AI and security. Platinum must be prepared to match this level of spending.

Ingram will emerge largely unscathed

Despite the volatility created by HNA, Ingram has managed to hold onto its position as the world's largest technology distributor. On a day to day basis, Ingram's management maintained autonomy without HNA involvement. Its balance sheet was protected from HNA, and it continued to generate cash and working capital to ensure financial stability. It generated sales of US$47.2bn in 2019 (down 6% year-on-year), with non-GAAP operating profits up 12% to US$820 million or 1.73% of sales. This compares to number two distributor Tech Data's fiscal 2020 sales of US$36.9 billion (down 1% year-on-year), and non-GAAP operating profits of US$582 million, or 1.57% of sales. Ingram's profits have strengthened further in the first three quarters of 2020, up by a third, although sales dropped, as spending was pulled down by the COVID-19 crisis in areas including infrastructure solutions. The sale to Platinum is unlikely to see significant operational changes for customers and vendors in the short term, apart from opening up investment plans, and the potential of a more motivated workforce. A question hangs over CEO Alain Monie's succession plans, as he approaches retirement, and the closing of the deal may be an opportunity for him to announce a replacement. Ultimately, the industry will be relieved that this rather sorry period in Ingram's history has come to an end and a fresh, new chapter can begin.