June 15, 2007 / 7:17 PM / in 11 years

Analysts mull Lexmark's status as takeover target

NEW YORK (Reuters) - Lexmark International LXK.N may be shaping up to be a takeover target, although analysts disagree on whether a hitch about the patents the printer maker licensed could put the brakes on a possible deal.

To be sure, no suitor has publicly announced interest in Lexmark, known for its inkjet and laser printers, and the company has not declared any interest in being sold.

But analysts say the active merger market could see a leveraged buyout by those interested in Lexmark’s competitive laser printers, its proven ability to generate cash, and its deflated stock price.

Lexmark shares have dipped 29 percent this year.

Bernstein analyst Toni Sacconaghi said on Friday a leveraged buyout at up to $70 a share -- an 18 percent premium to the market price of about $52 -- was “financially doable.”

“On balance ... a leveraged buyout of Lexmark is doable in the $60-$70 range, given the strong cash flows of the company and opportunity for expense reduction, offset by some potential risks,” he said in a note to clients. “We think this provides a floor for the stock in the $45-$50 range.”

A Lexmark spokesman said the company does not comment on rumor or speculation.

The idea of a Lexmark buyout has been bubbling since late in 2006. Most recently, computer maker Lenovo Group Ltd. (0992.HK) was rumored to lead a consortium that might buy the company in a vertical integration step.

However, earlier this week Cross Research analyst Shannon Cross noted that portions of Lexmark’s inkjet intellectual property are only available under cross-license pacts with Hewlett-Packard. (HPQ.N) and Canon Inc. (7751.T) -- deals that could be canceled if the company changes hands.

“We believe the existence of these agreements makes it almost impossible for Lexmark to sell itself (for the next few years) to a strategic buyer (and still maintain the inkjet business),” she said.

Citing publicly available documents, Cross said the HP and Lexmark cross-licenses will be terminated if companies on a confidential list obtain more than 25 percent voting power for Lexmark. The agreement is in effect until the last patent covered by the agreement expires, no sooner than 2012, Cross said.

    What’s more, Cross, who rates the stock at “sell,” said she believes that when it comes to the notion of buying Lexmark, Hong Kong-based Lenovo’s priorities lie elsewhere.

    “Following our recent meeting with (Lenovo) in Hong Kong, we ... believe that Lenovo is focused on a short list of high priority items,” she said. “Setting aside financial feasibility and IP concerns, we believe Lenovo has no interest in merging with a printer company.”

    Bernstein’s Sacconaghi disagrees that the licensing agreements would get in the way of any proposed deal.

    “While this may appear to make an LBO or other takeover of LXK difficult, Chief Executive Paul Curlander noted at our recent conference that cross-licensing agreements were commonplace in the industry and that in his experience they are negotiable,” he said.

    Shares of Lexmark rose 97 cents, or about 1.91 percent to $51.80, nor far from its 52-week low of $50.80.

    Investors have soured on the stock since the company released disappointing quarterly results in April. Lexmark is in the midst of a plan to reduce sales of unprofitable inkjet printers, invest in building more competitive printers, and boost spending on “demand generation” activities such as advertising and promotion.

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