Western Digital Corp. WDC, a hard disk drive (HDD) manufacturer, has enhanced its financial flexibility by pricing its $3 billion senior and unsecured term loan B facility (Term Loan) which will mature on Apr 29, 2023. The move will enable the company to reduce borrowing costs.
Besides enjoying higher borrowing capacity, the company can also avail lower interest rate since the LIBOR borrowing spread has been reduced by 175 basis points (bps) compared with the earlier term B loans issued in order to finance its acquisition of SanDisk Corp. This led to an annualized net interest savings of $128 million (starting from Aug 17, 2016).
Per the company, the proposed loan will have an interest rate of LIBOR plus 3.75% per annum. The company aims to use the funds raised from the proposed offering to settle the previous term B loans as well as a cash repayment of $750 million.
This in turn reflects annual cash interest savings of roughly $100 million. We believe this enhanced financial flexibility would offer the company a scope to grow and leverage development and acquisition prospects.
The company existed fourth-quarter fiscal 2016 with cash and cash equivalents of $8.15 billion compared with $5.89 billion in the previous quarter. During the quarter, Western Digital generated $355 million in cash from operations compared with $485 million in the previous quarter.
It is worth mentioning that the company reported fourth-quarter fiscal 2016 non-GAAP earnings per share (excluding amortization of intangibles and other one-time items) of 79 cents, which beat the Zacks Consensus Estimate of 72 cents per share. However, earnings were down from $1.51 per share reported in the year-ago quarter.
Western Digital’s shift toward non-PC applications, secular growth of digital data and growing exposure to the small and medium business space are the long-term positives. Additionally, higher demand for storage is expected to lead to a positive earnings surprise in the ongoing quarter.
We remain encouraged by the company’s launch of a string of storage devices under the mobile and cloud segment. Continued investments in product innovation could result in flattish margins in the near term.
Also, Western Digital’s entry into the wireless devices market comes at a time when storage services related to smartphones and tablets are witnessing large-scale adoption. These factors are expected to be growth catalysts, going forward.
Notably, Western Digital recently completed the acquisition of SanDisk Corp. The two companies had entered into a definitive agreement on Oct 21, 2015.
The SanDisk acquisition will open growth avenues for Western Digital and help it to gain market traction in advanced storage technology and the Solid State Drive (SSD) segment. The merger will lead to economies of scale, lower costs, increase market reach and improve product breadth, among other things. The company will also be able to offer competitive solutions in cloud-based computing, which has taken the digital storage solution space by storm over the past couple of years.
Similar strategic acquisitions are expected to expand its offerings in the SSD segment and place Western Digital in a better position compared to its peers such as Seagate Technology STX.
Western Digital currently carries a Zacks Rank #3 (Hold).
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