This report was originally published on 11/16/09.

CanonInc. today announced its intention to launch a takeover bid for Oce N.V., a leading manufacturer of digital printing systems and document management service provider.  Canon (CAJ 44.5 ↑0.04%) will launch a tender offer in 1Q10 at Eur8.60/share, or a 70% premium to Oce’s closing price on Friday.  The tender offer will also represent a 100% premium to Oce’s 12-month average trading price.

Oce specializes in high-end printing systems and document management services that are similar toARP (7.75 ↓1.65%)’s facilities management solutions.  ARP is one of, if not Oce’s largest customers.  Oce generates approximately 36% of its revenues in the US, while the rest is derived from its European operations.  Oce operates three primary divisions:

• Digital Document Systems- document output management for professional users in the form of hardware (printers, copiers, and scanners), software, consultancy and service.  The company’s primary clients are in the reprographics, financial, legal, telecom, public utility, and education sectors.
• Wide Format Printing Systems – manufactures wide format document and printing systems for customers in the construction, engineering, industrial and advertising sectors.
• Oce Business Services – supplier of document management related services and technology for businesses.  Services are provided on an outsourced basis, whereby the company will manage the print operations within a customer’s organization.

The table below outlines Oce’s revenue by service offering:

Source: Company reports

As we mentioned earlier, ARP is one of Oce’s largest clients, although the two do compete for facilities management contracts (Oce’s Business Services division).  We estimate facilities management revenues will represent approximately 20% of ARP’s 2009 full year revenues.  Additionally, ARP is a reseller of some of Oce’s equipment.

We view Canon’s decision to expand its presence in the color printing, wide format and facilities management businesses as a strong validation of the growth prospects in these service lines.  Over the past 12-18 months, ARP has expanded its service offerings in color and those oriented towards non-AEC (Architecture, Engineering, and Construction) clients.  The overlap between ARP’s and Oce’s end-customers is increasingly high; Oce is the OEM, ARP is the service provider.

From a financial perspective, Oce is a larger company in terms of revenues, but ARP generates higher operating margins and returns on invested capital.  In 2007, Oce generated approximately $330 million in EBITDA, compared to $173 million for ARP.  Assuming Oce had net debt of $792 million, we estimate Canon is paying approximately 5.7x cycle peak EBITDA (2007) on an enterprise value basis. ARP current trades at 3.0x 2007 EBITDA on an enterprise value basis.

We recognize there are significant concerns among investors about a secular decline in print volumes in the end-markets that ARP services. We think Canon’s decision to up its exposure to the very end-markets ARP services should allay some of these concerns.  In the downturn, ARP has expanded its ability to service non-AEC clients, offer color-printing solutions, and provide building information modeling solutions for its clients.  The company has rapidly repaid debt over the past 18-months and is well positioned to benefit from competitor distress caused by the downturn in non-residential construction spending.  ARP continues to be a “cash cow” and has a free cash flow yield in excess of 30% at current levels.  We continue to see significant upside in shares.

As always, please act accordingly…