Westcon Seeks $115 Million In IPO

Westcon Group filed a preliminary prospectus March 3. The distributor--which focused on local area networking in its early days and is now one of the top players in voice/data network distribution of Cisco Systems, Avaya and Nortel Networks products--had $1.36 billion in revenue for the nine months ended Nov. 30, with gross margins of 8.5 percent, according to the document. In its three prior full fiscal years, Westcon reported revenue of $1.65 billion for 2003, $1.68 billion for 2002 and $2.07 billion for 2001.

"We intend to use approximately $5.7 million of the net proceeds from this offering to repay a portion of our outstanding loan and accrued interest payable to Datatec [Westcon's parent company] and the remainder of the proceeds for general corporate purposes, including working capital and future acquisitions of businesses and assets that complement and expand our existing operations," the SEC document said. "Datatec will receive the net proceeds from the sale of any common stock by it if the underwriters exercise their overallotment option."

Westcon Group was founded in 1985. Since August 1998, its majority owner has been Datatec, a Woodmead, South Africa-based company that also owns Logicalis, a Bloomfield Hills, Mich.-based solution provider, and Mason, a telecom and convergence services company based in Manchester, U.K. Westcon Group includes the Westcon, Comstor and Voda One divisions that sell to Nortel, Cisco and Avaya-focused solution providers, respectively.

The IPO comes as distributor stocks are rising. Ingram Micro, the world's largest distributor of computer products, recently posted it highest close in nearly two years after reporting a 15 percent increase in sales for the fourth quarter.

This isn't the first time Westcon Group attempted an IPO. Westcon Group filed an S-1 for an IPO in January 2001, but the company backed off when it determined the market wasn't right, according to industry sources. If Westcon Group decides to complete an IPO this year, it would follow in the footsteps of broadline distributor Synnex, which went public last November. Synnex's stock has climbed 35 percent to $19.65 per share since its $14.50 initial offering.

Joe Denise, COO of Norcom Communication Solutions, a Thornwood, N.Y., voice/data network convergence solution provider and Westcon partner, said Westcon's IPO is a double-edged sword. On one hand, the influx of capital could mean increased co-marketing programs with Westcon and additional services for VARs, he said. But on the other hand, public status brings investor scrutiny on Westcon and a sharper focus on profitability, which could lead to cutbacks in some VAR services, he noted.

"We've seen a drop-off in service among some larger telecom service providers that went public because of the focus on profitability and the return for shareholders," Denise said.

One investment adviser, who follows the large publicly held distributors and asked not to be identified, said the distribution segment may benefit from the increased visibility from a Westcon Group IPO. "Because they will now have to publicly disclose, it gives everyone a better sense of the competition," he said.

The U.S. distribution market remains tough, with low single-digit growth, he said, adding that Europe is a much more attractive market for global distributors.

SCOTT CAMPBELL contributed to this story.