Shareholder sues Xerox over deal with Fuji

The gloves are off.

Darwin Deason, Xerox Corp.’s third-largest shareholder, has filed a lawsuit against Fujifilm Holdings Corp.; Xerox; current Xerox board members; and Ursula Burns, Xerox’s former chairman and CEO. The complaint was filed Feb. 13 in the Supreme Court of the State of New York, New York County.

In the complaint, Deason alleges the following:

• The Xerox/Fuji transaction is the result of an improper and fraudulently concealed “crown jewel” lock-up agreement that Xerox entered into with Fuji 17 years ago, that was never disclosed to Xerox’s shareholders before the signing of the Xerox/Fuji transaction;
• The “crown jewel” lock-up agreement precludes a transparent and fair process for the potential sale of Xerox;
• Despite its duty to do so, Xerox’s board fraudulently never disclosed the “crown jewel” lock-up;
• Fuji and Fuji Xerox participated in a “WorldCom”-like accounting scandal that was uncovered in 2017 and gave Xerox the right to terminate the crown jewel lock-up provision, but the Xerox Board failed to terminate the provision;
• Xerox publicly admitted that the lock up “limit[ed] Xerox’s strategic flexibility,” which caused the Xerox board to sell 50.1 percent of Xerox to Fuji;
• Xerox/Fuji deal is extremely off-market:
  – No control premium for Xerox shareholders
  – 50.1 percent/49.9 percent Fuji control
  – Xerox CEO and board members retain jobs
  – No Xerox market check or sale process
  – Xerox share price has declined 2.4 percent since the unaffected date (Jan. 10) to Friday’s close (date prior to issuance of Icahn/Deason letter); and
• Deason seeks to enjoin the transaction, terminate the Xerox/Fuji joint venture lock-up and joint venture agreements and pursue strategic alternatives for Xerox.

For its part, Xerox officials said Deason’s allegations are without merit and the company will vigorously defend itself.

“After having considered all strategic alternatives available to the company, Xerox’s board of directors remains steadfast in its belief that the combination with Fuji Xerox is the best path to create value for the company and its shareholders. It is unfortunate that Mr. Deason is seeking to interfere with Xerox shareholders’ right to decide and is relying on meritless legal claims,” company officials said in a statement. “Xerox has fully disclosed the joint venture agreements, and the company will respond to Mr. Deason’s legal claims through the appropriate legal channels in due course.”

Xerox —on the heels of Monday’s open letter from shareholders Deason and Carl Icahn—is calling many of the Icahn/Deason letter’s statements “misleading” and “inaccurate.” Xerox’s board has thus far declined to engage in a public debate, officials said Tuesday morning, but the letter “warrants a written response to ensure the facts are clear for all Xerox shareholders.”

In their letter, the two shareholders, who collectively own about 15 percent of Xerox’s shares, called to issue a deal between Xerox and Fujifilm in which “without putting up any cash, (Fuji) will receive (1) an additional, indirect 25 percent interest in a Fuji subsidiary that just last year disclosed a $360 million accounting scandal caused by a ‘culture of concealment’ and Fuji’s failure to have adequate management systems, and (2) a one-time special dividend financed with our own assets.”

When Fuji and Xerox announced the $6.1 billion deal Jan. 31, it was noted that the merger would give Fujifilm 50.1 percent ownership of the combined company, to be known as Fuji Xerox. Xerox shareholders will receive a $2.5 billion special cash dividend, or roughly $9.80 per share, funded from the combined company’s balance sheet, and will own 49.9 percent of the company.

Fujifilm, following the merger announcement, said it would slash 10,000 jobs globally at the Fuji Xerox subsidiary, which last year employed more than 45,000 people.

In its statement Tuesday, Xerox said the proposed combination of Xerox and Fuji Xerox followed a year-long review of value-enhancing alternatives available to the company. That review found that the proposed merger “delivers significantly more value to Xerox shareholders than would be achievable on a standalone basis.”

Icahn and Deason have asked shareholders to reject the deal, citing a number of issues. The two shareholders contend that the economics of the transaction disproportionately favor Fuji at Xerox shareholders’ expense.

“When we sketch out the financials of the deal, this is our conclusion,” Icahn and Deason wrote. “We—the existing Xerox shareholders—are selling approximately $535 million of normalized annual recurring cash flow for about $1.25 billion. In other words, we are selling control of Xerox for a cash flow multiple barely exceeding 2.3x.”

But Xerox in its statement called their math “suspect.”

“This analysis is just plain wrong,” Xerox officials wrote. “As discussed in prior presentations to investors, Xerox shareholders receive in the transaction a $2.5 billion dividend at closing; 49.9 percent of the combined Xerox and Fuji Xerox; and 49.9 percent of the benefit of the value created from at least $1.7 billion of annual cost savings, including $1.25 billion in cost synergies that are only achievable via this transaction.”

Icahn and Deason in their letter suggested “freeing the company from the shackles of the Fuji Xerox joint venture,” a strategy that Xerox officials say is not viable.

“The joint venture between Xerox and Fujifilm has existed in various forms since 1962,” Xerox officials note. “The current structure dates to 2001, when Fujifilm acquired additional shares in the joint venture to bring its ownership to 75 percent.”

The agreement is a binding legal document “that cannot be simply wished away, renegotiated or dissolved because Mr. Icahn and Mr. Deason desire it so.”

To Icahn and Deason’s claim that Xerox shareholders will become passive minority owners, with no opportunity to receive a control premium, Xerox officials said its board negotiated “strong minority protections,” including five independent Xerox designated directors to serve for five years.

Xerox also noted that Chief Executive Jeff Jacobson—whose firing Icahn and Deason have demanded for weeks—will represent one of the seven Fujifilm board designees and serve as CEO of the combined company.

The document company noted that while Icahn and Deason contend that the company’s revenue and margin have continued to decline in the last three years, its full-year 2017 results “clearly demonstrate that the strategy we have implemented is working as we met or exceeded every financial metric we guided to in 2017.”

“In conclusion, Mr. Icahn and Mr. Deason fail to provide an actionable plan or any cogent ideas to make their scheme a reality,” Xerox officials said in their statement. “Following their playbook would be both highly irresponsible and unlikely to succeed, particularly given the terms and constraints of the existing Fuji Xerox joint venture agreement, and the realities of today’s competitive environment.”

Icahn on Feb. 5 sold 140,011 shares of the company’s stock, at a total value of $4.55 million. The transaction was disclosed in a Securities and Exchange Commission filing last week. Shares of Xerox stock (Nasdaq: XRX) were down more than 2 percent to $29.25 in Tuesday morning trading.

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