CHS ‘evaluates strategic alternatives’, red inks $89.2m

For sale, one distie giant?

CHS has effectively put itself up for sale. The distie giant is to hire an investment bank to "evaluate strategic alternatives that would enhance shareholder value" -- the standard industry euphemism for "buy us". Times may be tough for distributors -- but times are tougher for CHS than most. It is paying the bills for its dash for growth -- the major reason for a spectacular Q2 net loss of $89.2 million. On an operating level (minus non-cash adjustments), the company lost $14.2 million for the quarter, compared with operating income of $22.8 million for Q2 1998. Throw in a heap of mostly non-cash charges (ie. they sit on the CHS balance sheet) and the company's operating loss was $73.2 million. Net loss was $89.2 million. CHS blames the disk drive price war for a "severe drop in pricing on margins in mass storage products in the second quarter of 1999" for a 1.5 per cent fall in gross margins in Q2. Tough competitive pricing in Europe, especially in Germany and the UK, also contributed to pressures on margins (down from 6.4 per cent in Q2 ,1998 to 4.9 per cent this time around), CHS says. Falling margins are not the root cause of CHS problems, but it makes it harder for the company to finance post-acquisition restructuring under its own steam. On the bright side, sales increased 32 per cent to $2.3 billion from Q2 1998's $1.8 billion. It's not clear how much of this organic growth and how much comes from new acquisitions. The company says it is on target with its expenses shaving -- shutting down warehouses, improving inventory turns, sacking staff and the like. The company has appointed Mark Keough, described as a "turnaround" specialist to the newly appointed post of chief operating officer. He will report to CHS top banana Claudio Osorio. So we can expect an acceleration of the company’s cost-cutting plans. And more divestments. First on the block is a "non-core" unit which distributes Sun Microsystems products in Germany, Austria, Denmark and Sweden for $50 million. CHS expects a pre-tax gain of $32 million from its share of the business (which turns over $70 million a year and makes $1 millions profits) and will use the cash for "debt repayment, payment of earn-out liabilities and working capital purposes". ®

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