Introducing third-party financing to Westcon

General Atlantic will provide a $375m six-year loan to Westcon International Group Holdings Limited (WIGHL) and pay $25m for a 5% equity stake in WIGHL. WIGHL will also issue warrant shares to General Atlantic. WIGHL will use the proceeds from the loan and an additional $75m from existing facilities to repay the $450m shareholder loan previously advanced to WIGHL. On closure of the deal, through the equity investment and warrant shares, General Atlantic will own 8.7% of WIGHL and will be entitled to benefit from 8% of any WIGHL equity upside above $540m.

Cash proceeds to fund special dividend

Datatec intends to return its share of proceeds to shareholders in the form of a special dividend. Paying out the full amount of $434m would equate to a dividend of $1.82/ZAR30.08 per share. We have revised our forecasts to reflect the new corporate structure, with higher interest payments on the external debt as well as a higher minority interest deduction for Westcon. Our underlying EPS forecasts reduce by 16.7% in FY27, 23.8% in FY28 and 21.8% in FY29. We estimate that group net debt/EBITDA will increase to 1.3x at the end of FY27, falling to 0.7x by the end of FY29.

Valuation: Positive reaction to the Westcon deal

The share price is up 22% since we last published and 13% since the transaction was announced; Datatec currently trades on EV/adjusted EBITDA multiples of 4.8x in FY27 and 4.5x in FY28, well below its peer group (average of 8.1x across both years). On a conservative sum-of-the-parts valuation using peer group averages, we estimate that Datatec could be worth ZAR104.43, 9% more than the current share price; post the special dividend this would reduce to ZAR74.35. Sustained recovery in trading in Logicalis Latam, gross profit growth and improving the conversion of gross profit to EBITDA across the group will be key to further reducing the discount to peers.

Westcon refinancing

On 19 June, Datatec announced that it had agreed the refinancing of its Westcon division, which includes a small equity investment by General Atlantic (through two subsidiaries: Atlantic Park Strategic Capital II Designated Activity Company and Atlantic Park Strategic Master Fund III, LP). The transaction is expected to complete on 14 July.

Background to the deal

The Westcon International division, trading as Westcon-Comstar, is a global distributor and provider of communications, networking, cybersecurity and cloud infrastructure with a 40-year history. It operates in 50 countries across Europe, Asia-Pacific, the Middle East and Africa. Datatec has owned the business since 1997. Datatec sold the US operations of Westcon to TD Synnex in 2017; as part of this transaction, TD Synnex retains a 7.9% stake in Westcon. In FY26, Westcon generated profit after tax of $66.8m and had net assets of $127.7m at the end of the year.

The table below shows the financial performance of Westcon over the last eight years. The company has only reported gross invoiced income as far back as FY24 as this was when it changed how it reported revenue to take account of products sold on an agency basis. Management stated that gross invoiced income has grown every year of the last seven years. The accounting change also explains why revenue drops from FY24. We view gross profit as a better measure of performance as this strips out the effect of principal/agency accounting. Adjusted EBITDA excludes one-off items and share-based payments. Gross profit has grown at a CAGR of 9.7% over the last seven years, EBITDA at 62.0% and adjusted EBITDA by 32.5%. The conversion of gross profit to adjusted EBITDA has increased from 9.2% to 34.5% over the same period.

Exhibit 1: Westcon financial performance FY19–26

Source: Datatec Note: revenue from FY24 includes software reported on a net basis.

In the chart below we show the current ownership structure of the Westcon division. Weston International Limited (WIL) advanced a $450m shareholder loan/fixed return instrument to WIGHL in 2023. This would have been adjusted out on consolidation for Datatec group accounts.

Exhibit 2: Current Westcon ownership structure

Source: Datatec

Transaction details

The transaction is made up as follows:

• Refinancing of the shareholder loan to WIGHL;
• Cash equity investment in WIGHL by General Atlantic;
• Issue of warrants in WIGHL to General Atlantic; and
• Restructure of the WIGHL management incentive plan.

Refinancing of shareholder loan

General Atlantic will provide a $375m senior secured loan to WIGHL. This will incur interest at 9% per year and has a six-year term. The $450m shareholder loan plus any accrued interest will be repaid to WIL using the proceeds of the new loan as well as $75m from WIGHL’s existing financing facilities. We understand that the loan will be second-lien debt and does not have recourse to Westcon’s working capital or the wider Datatec group.

Based on the net debt position of Westcon at the end of FY26, we estimate that the transaction will increase the level of gearing (net debt/adjusted EBITDA) for Westcon to c 3.0x by the end of FY27.

Equity investment in WIGHL

General Atlantic will acquire a 5% stake in WIGHL from existing shareholders for a cash price of $25m. Based on the proposed shareholdings post the transaction, we estimate that WIL is selling 2.2% of its 95% stake and management is selling 2.8% of its 5.0% stake.

Issue of warrants

General Atlantic will be issued warrant shares for nominal consideration. The warrant shares have been structured to replicate the economic effect of 4% penny warrants and 8% at-the-money warrants (at the current valuation) whereby General Atlantic will share in Westcon’s equity value accretion above $540m (the current equity value of $500m plus the $40m price payable for the at-the-money warrants). A 4% penny warrant gives the holder the right to buy 4% of the shares of WIGHL at a price of $0.01 per share. The 8% at-the-money warrant gives the holder the right to buy 8% of the shares of WIGHL at a total cost of $40m. The 4% penny warrants are immediately effective.

Restructure of management incentive plan

While specific details have not been provided, the reset management incentive plan aligns management incentives with the post-recapitalisation capital structure and the long-term interests of all shareholders.

The combined effect of the 5% equity investment and the warrants can be seen in Exhibit 3. General Atlantic will have an effective 8.7% stake in WIGHL (this includes the penny warrants but not the at-the-money warrants). WIL’s stake will reduce from 95% to 89.2% and senior management from 5.0% to 2.1%.

Exhibit 3: Proposed Westcon ownership structure

Source: Datatec

Transaction rationale

The board sees four main benefits from the transaction:

• Strategic partnership with General Atlantic: the equity investment and the warrant shares issued to General Atlantic align its interests with those of Datatec and Westcon management. The partnership also provides the Westcon business with access to General Atlantic’s global network and sector expertise to support its growth strategy. After several years of transforming the business, it is now at the point where further scale could produce an acceleration in performance improvement while appealing to additional technology suppliers and customers.
• Return of capital: management expects to pay out the net cash proceeds of $434m in the form of a special dividend. We estimate that this is calculated as 92.1% of the total of the repayment of the shareholder loan of $450m, accrued interest of $10m and WIL’s share of the proceeds of the equity investment. Paying out the full amount would equate to a dividend per share of $1.82/ZAR30.08.
• Capital structure: this provides independent third-party financing for Westcon, creating a standalone capital structure for the business. This should make it easier to separate Westcon from the rest of the Datatec group in the event of an IPO or sale.
• Westcon management alignment: the reset of the incentive scheme should align Westcon management with the new corporate structure and the long-term interests of Datatec shareholders.

Unlocking shareholder value

Datatec initiated a strategic review in 2021, creating an ongoing programme to close the gap between the market valuation of the group and the intrinsic value of the underlying businesses. Measures management has taken since then include:

• Improving the operational and financial performance of each business;
• Increasing the dividend payout ratio from 33% to 50%;
• Incentivising divisional management by allowing them to invest in their respective businesses; and
• Selling Analysys Mason and returning the proceeds to shareholders as a special dividend.

This transaction allows Datatec to return a meaningful amount to shareholders while structuring Westcon in a way that provides options for its future, whether that be accelerating organic growth or ultimately selling or spinning off the business.

Changes to estimates

We have factored in the higher level of third-party debt, which will accrue annual interest of $33.75m, and have also factored in additional interest on the $75m usage of the working capital facility. We assume proceeds of $11m from WIL’s sale of shares to General Atlantic. We have assumed maximum payout of the $434m net proceeds in the form of a special dividend in FY27. The percentage we use for the Westcon minority interest assumes equity accretion to the peer group average valuation.

Exhibit 4: Changes to forecasts

Source: Edison Investment Research. Note: uEPS, underlying EPS.

Valuation

The transaction values WIGHL at an equity value of $950m before repayment of the shareholder equity loan and, post the repayment of the shareholder equity loan, an equity value of $500m. Assuming net debt of $300m (the average net debt through the year), this values WIGHL at an enterprise value of c $1,250m.

On our adjusted EBITDA forecasts, this values the business on an EV/EBITDA of 6.5x for FY27e and 6.0x for FY28e. We note that this is at a discount to the average of its peer group (8.9x and 8.0x respectively). We expect that the discount reflects the minority nature of the stake as well as the lack of marketability compared to listed peers, and we note that the equity investment was part of a financing package that also included the debt and the warrants. We would expect a change of control transaction to attract a multiple much closer to the peer group average, with both Westcon and General Atlantic incentivised to achieve a higher valuation.

Exhibit 5 shows a sum-of-the-parts valuation on the new basis, with a higher minority interest deduction for Westcon. We use the end of FY26 net debt position increased by $150m to reflect higher average usage of debt facilities during the year. The ex-dividend valuation, assuming the full net proceeds of $434m are paid out, is ZAR74.35 per share.

Exhibit 5: Sum-of-parts valuation

Source: Edison Investment Research, LSEG Data & Analytics (as at 29 June)

Exhibit 6: Financial summary

Source: Datatec, Edison Investment Research