Datatec Is Set To Make A Deal: Is WestconGroup For Sale?

WestconGroup and Logicalis parent company Datatec Ltd. announced it is negotiating a material transaction. Sources tell CRN the most likely outcome is the sale of $4.9 billion distributor WestconGroup.

Datatec Ltd., the parent company of WestconGroup and Logicalis, announced it is negotiating a material transaction and sources tell CRN the most likely outcome is the sale of $4.9 billion distributor Westcon-Comstor (the go-to-market brand of WestconGroup Inc.).

Johannesburg, South Africa-based Datatec said in a regulatory filing that the transaction being negotiated could have a material effect on the $6.5 billion company's stock price if it is successfully completed. Datatec said it will not issue its usual interim management statement detailing the publicly-traded IT conglomerate's performance over the past quarter.

Sources indicated to CRN that Westcon-Comstor - which has struggled financially in recent quarters - is the most likely candidate to be sold. Datatec's stock is up 2.5 percent to $3.73 per share since the announcement was made early Wednesday.

[RELATED: CRN Exclusive: Westcon Deepens North American Security Portfolio With New Gigamon Alliance]

Westcon and $1.5 billion solution provider Logicalis, also owned by Datatec, declined to comment. Datatec did not respond to requests for comment. Datatec spent $160 million in June 1998 to purchase a 92.5 percent stake in WestconGroup and quickly expanded into Europe, which now accounts for 34 percent of the distributor's overall sales.

Westcon's revenue fell 10 percent in the most recent filing period to $2.26 billion, with sales dropping in all of the company's geographies except Asia-Pacific. The company's earnings before interest, taxation, depreciation and amortization (EBITDA) sunk by 18 percent to $42.9 million due to lower profitability in Latin America and efforts to transform the company's business process outsourcing (BPO) practice.

One longtime partner said that his Westcon business has plummeted from several million dollars to less than $100,000 annually due to the Tarrytown, N.Y.-based distributor frequently dropping product lines. The partner said he had been procuring lots of Brocade, Palo Alto and Eaton from Westcon as recently as six years ago, but the business dwindled as he found product lines were frequently out of stock.

"From our standpoint, Westcon has sort of fallen off the map over the past couple of years," the partner said. "For what we were doing, the relationship just ran its course."

The partner said he enjoyed working with Westcon when the products he needed were readily available, praising the distributor's programs, salespeople and credit offerings.

"When they were doing their thing, I thought they were doing a good job," the partner said.

Westcon derives 90 percent of its revenue from just 15 global vendor partners, CEO Dolph Westerbos told CRN in 2015, with 42 percent of overall sales coming from its Cisco-exclusive Comstor business. Other vendors Westcon works closely with include Avaya – which filed for Chapter 11 bankruptcy protection earlier this month – Polycom, Juniper, Check Point, F5, Palo Alto and Blue Coat (now Symantec).

Another partner told CRN that both the Comstor and Westcon sides of the business seem to be pretty healthy, with no recent customer-facing staffing changes.

The partner said WestconGroup appears to be well-supported by Datatec, noting that Westcon is run as a standalone business unit with minimal corporate interference. The partner conducts all of his business through Westcon's North American operating unit, which he said facilitates service around the globe.

"Westcon has support, but they're run on their own," the partner said. "Our working relationship with them is very strong."

The sale of Westcon would definitely be disruptive to this partner's business since the partner would need to ascertain what changes are occurring and re-establish relationships with the new management teams. Although the solution provider said he has multiple distributors with which he can do business, Westcon is his preferred distribution partner.

A third solution provider told CRN that the sale of Westcon wouldn't impact his business since the solution provider could turn to other distributors for product procurement.

Westcon's security practice has grown over the past year from 33 percent to 36 percent of its overall business, and its networking practice has grown during that same period from 24 percent to 26 percent of overall sales. But Westcon's unified communications sales have dropped from 26 percent to 22 percent of revenue, and its data center business has sunk from 17 percent to 14 percent of total sales.