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EMC offers Quantum solace

Helps it cope better with that darn ADIC debt

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EMC has given struggling tape, disk and deduplication vendor Quantum a sorely-needed $100m financial lifeline.

Quantum will use the cash to refinance its convertible debt, which dates back to 2003. A different credit line, Quantum's senior debt, was used to finance the ADIC acquisition for almost $800m in May 2006. As of December 31, 2008, that debt was $249M, and it is due in 2014.

Quantum has been paying for it ever since, spending tens of millions of dollars a year. It needs to refinance the majority of this convertible debt by February 2010 and the current financial environment suggests it would have been burdened with an unduly high rate of interest.

Quantum formally announced that it has "commenced a tender offer for up to $142m in aggregate principal amount of its outstanding 4.375 per cent Convertible Subordinated Notes due 2010." It intends to finance the tender offer with "the net proceeds of a term loan it expects to receive from EMC Corporation, pursuant to a financing commitment for a term loan credit facility of up to $100 million." The closing of the EMC loan is subject to the execution of definitive loan documentation and customary closing conditions.

This refinancing will help with the threatened delisting of Quantum from the New York Stock Exchange, which was suggested because Quantum's stock price had fallen below the $1 minimum required. Quantum said earlier this month that the NYSE had accepted the company's proposed business plan for continued listing.

Why is EMC bothering?

Why should EMC bother giving a cash lifeline to Quantum? One reason is that it licenses Quantum's DXi deduplication technology for its own use and needs to ensure that Quantum can continue to invest in the DXi technology enhancements required by EMC. There is another possible Quantum-EMC relationship that could be influential, as EMC resells ADIC tape libraries, as El Reg referenced here.

Rick Belluzzo, Quantum's chairman and CEO, said: "[this] further reinforces the strength of the Quantum-EMC partnership and the work we've been doing together to bring the benefits of data deduplication to customers. Despite the significant improvements in operational performance Quantum has made over the past year, our capital structure has clearly been a hindrance in the current economic environment."

In other words, Quantum's tape revenues have been tumbling faster than its newer disk-based protection product revenues have been rising, and it would have had to spend money needed for DXi development both on the ADIC senior debt and convertible debt repayments. The recession has already caused layoffs and losses at Quantum.

At the end of January, Quantum announced fiscal 3rd quarter 2009 revenues of $204m and a net loss of $340 million, or $1.63 per share. It said that: "Compared to the same quarter in the previous year , Quantum's total revenue was down 19 per cent, due to the weaker economic environment, the company's strategy of continuing to shift its sales mix toward higher margin opportunities and a year-over-year decline in branded tape sales and media royalties."

However ADIC, although a financial millstone, was not a disastrous buy as it brought the DXi technology into Quantum.

Rich Napolitano, an EMC SVP, said that with this EMC loan, "Quantum will be able to focus more energy on continued innovation and working with EMC to remain front and centre in one of the storage industry's hottest trends."

It's interesting to see how important DXi deduplication and replication technology is to EMC and its partner Dell. It is using Quantum's DXi technology to develop a common dedupe product across its EMC-sourced and its in-house EqualLogic storage arrays.

The repayment or interest terms on the EMC financing have not been revealed. Both EMC and Quantum are stressing that this is not a takeover. I should think not; spending a hundred million to buy Quantum would be a steal. ®

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