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Imation Acquires TDK’s Blank-Media Brand

UPDATE! Oakdale, Minn. — Furthering the consolidation of the recordable optical media market, Imation agreed to purchase TDK’s media business brand in a cash and stock deal worth up to $370 million.

The deal includes the use of TDK’s brand name for current and future recording media products including magnetic tape, optical media, flash media and accessories. The boards of both companies have approved the transaction.

Tokyo-based TDK will retain its research and development, manufacturing and OEM business.

TDK will receive approximately $280 million in Imation common stock, representing approximately 17 percent of shares outstanding, and $20 million in cash, subject to certain conditions, with potential for payment of up to an additional $70 million based on future financial performance of the acquired business. The deal is expected to close in the third quarter.

The move comes less than a year after Imation, a major supplier to the commercial market, completed a deal for Memorex, giving them a significant stake in the U.S. consumer optical media market and a No. 1 share worldwide in optical discs such as CDs and DVDs, according to Imation. The TDK acquisition strengthens that position, Imation chief financial officer Paul Zeller told analysts in a conference call, citing the brand’s strong share in Europe and Japan. “The brand positions are complementary,” Zeller said, “with the Imation, Memorex and TDK brands, we now have a combined 30 percent global share across the formats.”

The deal also gives Imation its first entry to the flash media market and significantly strengthens Imation’s position in Blu-ray, as TDK is a member of the Blu-ray Disc Association and a leading supplier to the market. Calling TDK “a leader in Blu-ray, including patents and intellectual property,” Imation president/CEO Frank Rossomanno cited continued price erosion in the mature CD and DVD markets as a driver to the deal. Long-term, Rossomanno predicted “significant upside” in Blu-ray and flash.

Zeller noted TDK’s string of significant negative financial results in recent years, but said that in the past year TDK took actions to address the issues and profitability has improved for the company overall “and their recording media business has become profitable in recent quarters.” He estimated TDK’s media business at about $670 million in revenues in 2006.

TDK becomes the largest shareholder of Imation and will get a seat on Imation’s board. The agreement limits TDK’s ownership stake to 22 percent of Imation common stock on a fully diluted basis.

Zeller highlighted the potential savings for Imation as a result of synergies in the areas of cost reduction, operational efficiencies, supply-chain management and bulk purchasing benefits. The deal also includes “a committed understanding” of supply agreements from TDK’s manufacturing side and long-term pricing benefits. “As a significant owner, [TDK] has a significant interest in seeing us be profitable,” Zeller told analysts.

TDK’s media business operates in Europe, Japan, the United States and Asia. “A number of” TDK employees are expected to transfer to Imation upon the deal’s closing, according to a joint release.

TDK will continue R&D and manufacturing operations for media including audio, video and data storage tape, and Blu-ray optical discs. TDK will supply Imation as well as its other OEM customers.

“Imation is bringing the well known TDK brand into our growing portfolio of strong consumer brands as well as adding the highly respected TDK brand recording media products to our commercial and consumer product portfolio,” Russomanno, Imation president/CEO said. “Imation and TDK have established the foundation for a long-term strategic relationship that potentially allows the two companies to collaborate in other areas of mutual interest and benefit” Russomanno added.

Takehiro Kamigama, TDK president said: “Powerful brands are important as consumers trust their critical information to these products. TDK and Imation can develop an ideal cooperation by complementing each other’s strengths in terms of regions, product and technology. The combination of the powerful TDK brand and the global brand and product management capabilities of Imation is the right strategy to take full advantage of these trends, compete effectively, meet evolving market demand and profitably grow the business … This transaction positions the TDK brand to continue to meet consumers’ needs into the future.”

Concurrently, Imation reported earnings for the fiscal first quarter of $421.9 million, a growth of 25.9 percent over Q1 2006 with profits of $81.8 million, up 3.3 percent. Imation said growth was driven by optical and flash products primarily due to the addition of Memorex brand revenue.