Bullboard - Stock Discussion Forum Open Text Corp OTEX

Primary Symbol: T.OTEX

Open Text Corporation is a Canada-based information management company, which provides software and services. Its comprehensive Information Management platform and services provide secure and scalable solutions for global companies, small and medium-sized businesses (SMBs), governments and consumers around the world. It has a complete and integrated portfolio of information management solutions... see more

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Open Text Corp > RBC

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Post by retiredcf on May 02, 2024 9:16am

RBC

May 1, 2024

Open Text Corporation
Closes AMC divestiture slightly earlier than we expected

NASDAQ: OTEX | USD 35.31 | Outperform | Price Target USD 53.00

Sentiment: AMC divestiture closes slightly earlier than we expected. This morning, OpenText announced that it has closed the divestiture of its AMC business to Rocket Software for $2.275B cash, before taxes/fees/adjustments. The close occurred slightly earlier than our expectations for a late Q4/FY24 close (i.e. June 30). With OpenText reporting tomorrow after market close, the company is likely to reflect the divestiture in its Q4 quarterly factors and FY24 outlook, whereas consensus Q4 and FY24 estimates include AMC. We estimate that the divestiture will reduce Q4 and FY24 by $83MM revenue, $46MM adj. EBITDA and $0.05 adj. EPS. All else equal, we believe that OpenText is likely to adjust its Q4 quarterly factors and its FY24 outlook by a similar amount.

Divestiture reduces leverage and may lead to a dividend raise and share buybacks. OpenText intends to use the net proceeds from the divestiture (~$2B) to reduce debt, specifically its floating rate term loans, which management expects to lower annual interest costs by ~$150MM. Based on the acquisition closing today, we estimate OpenText's leverage will drop to 2.6x net debt / NTM EBITDA in Q4 from 3.7x last quarter (Q2/FY24). With the reduction in leverage and annual interest costs, OpenText should have improved financial flexibility and additional FCF, which it may consider returning to shareholders through higher dividends and share buybacks. We estimate that OpenText could increase its quarterly dividend by 20%, assuming a similar payout ratio as FY22 (27%). Long-term, OpenText is targeting dividends/ buybacks at 30% of FCF, based on its FY26 aspirations.

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