Silver Lake, TPG To Sail Seagate In $1B IPO –

Less than three years after Silver Lake Partners and Texas Pacific Group acquired it for $2 billion, Seagate Technologies Inc. has filed with the Securities and Exchange Commission to raise $1 billion through a public offering. The hard-disk seller filed its registration on Oct. 11, but there is no date set for the IPO.

At press time it was still unclear what size portion of the company the investors will be selling off if Seagate raises the entire sum of $1 billion. “We have no idea of the actual worth of the company or its stock until we see how the market reacts,” said a source close to the deal. “Whatever is left [after the IPO] still belongs to [the investors].”

Silver Lake and TPG took Seagate private in 2000 for $2 billion, acquiring equity of $1.1 billion and $900 million of debt. The source said since that time, strong sales have helped bring debt down to $750 million.

Both firms declined to comment on the transaction, citing SEC regulations.

According to a Seagate press release, Seagate reported net income of $110 million for the third quarter of 2002, with EBITDA at $226 million. During the same quarter of 2001, Seagate’s net income was $34 million and EBITDA was $132 million. EBITDA for Seagate’s fiscal year ending in June 2002 was $967 million, with a fiscal year net income of $449 million.

In April 2000, Silver Lake Partners took Seagate private in a complex transaction valued at just over $2 billion (Buyouts, April 17, 2000). Joining Silver Lake in the deal were Texas Pacific Group, Chase Capital Partners and venture capital firms August Capital and Integral Capital Partners.

Seagate’s strong position in its industry may explain filing at a time when the stock market is at such a low point, analysts said. “Relative to their competition, Seagate looks as good as they’ve ever looked, and better than they will look in three to five years, due to some big mergers on the horizon, such as IBM and Hitachi,” said John Monroe, a vice president at Gartner Group. “The amount of money and resources Seagate has spent on research and development over the last five years is keeping them at the technological forefront of this industry.”

Scotts Valley, Calif.-based Seagate Technologies accounted for 28.3% of the hard disk market, making them the market leader, according to Gartner Group’s Gartner Dataquest. Competitors Maxtor and Western Digital follow Seagate at 24.7% and 15.5%, respectively.

It is well known that the pubic market is not a friendly place for technology companies these days. Seagate’s aforementioned competitors are trading well below their all time highs. Maxtor, now trading around $2.00, topped $21 in late 1999. Western Digital, currently trading in the $5 range, peaked at around $55 in 1997.

Cutting edge technology and pricing wars have combined to make the hard disk industry a land scarred by low IRRs and price wars. With IBM expected to announce a rate of return in the neighborhood of 40% to 50% for their businesses, Seagate “averages between 10% and 20% on a good day,” according to Monroe, who expects an upturn in this sector when the larger conglomerates swallow up the smaller players. “The industry as a whole is beginning to engage in wiser market management, which will directly impact their ability to sustain profitability,” he added.