NCR's Retail Software Gusto Rings Up High Price for Retalix

--NCR buys retail-IT company Retalix as part software-focused strategy

--Company projects retail is on cusp of upgrade cycle

--Others have bought similar groups for less lately

 
   By Joan E. Solsman 
 

NCR Corp. (NCR), with its $650 million pact to buy retail-software company Retalix Ltd. (RTLX), took a big step closer to becoming a digital-age update of the cash-register business it was founded upon more than century ago.

The company is betting on a recovery in retailer spending on checkout technology, but analysts note this deal rang up at a high price.

NCR, now known largely for its automated teller machines, is evolving into more software offerings in broader sectors outside its stronghold of banks, a strategy aimed at strengthening both its diversification and profitability.

Last year's $1.2 billion purchase of Radiant Systems Inc. brought NCR a maker of kiosks and technology systems for restaurants and hotels. With Retalix, NCR positions itself as the leader in retail checkout as well, gaining customers like Carrefour S.A. (CA.FR) and Tesco Corp. (TESO) that rank among the biggest merchants in the world.

Yet NCR's sales to retailers have been soft lately, with retail-segment revenue expected to decline this year. Store operators have held off upgrading self-checkout lanes and other transactional technology since a surge in replacements five years ago as they grappled to understand how mobile payments and Internet shopping fits into brick-and-mortar models.

NCR has been noting signs of a pent-up investment cycle for retail customers. Momentum both in orders and backlog is strong, the company says, and it believes most retail point-of-sale systems in the U.S. will be upgraded the next three years.

In a sign the upswing has begun, it inked a deal to expand its self-checkout partnership with Wal-Mart Stores Inc. (WMT), the world's biggest retailer, earlier this month.

However, the company's confidence in a retail turnaround may have led it to overpay for Retalix, judging by the prices others have agreed to spend to take over similar companies recently.

For one, Micros Systems Inc. (MCRS) bought a U.K. maker of IT systems for convenience stores, gas stations and pubs at the end of May. The target, Torex Retail Holdings Ltd., fetched a purchase price of GBP119.9 million, which translated to almost $185 million when it closed.

Micros Systems estimated Torex booked nearly that much in revenue the same fiscal year. It also estimated Torex would have contributed nearly $184 million to Micros revenue in its fiscal year--which ended a month after the deal closed--had Torex been part of the company the whole time.

NCR, meanwhile, plans to pay more than double Retalix's projection for revenue this year.

More recently, private-equity firm New Mountain Capital LLC secured a buyout deal for JDA Software Group Inc. (JDAS), which makes software to help retailers keep shelves stocked and handle back-office functions. The deal pegs JDA's value at $1.9 billion, a multiple of about nine or 10 times analysts' estimates for next year's earnings before interest, taxes, depreciation and amortization.

NCR is playing a much higher multiple for Retalix: the $650 million purchase price is 17 times next year's Ebitda.

"NCR paid a steep price," Oppenheimer analyst Ian Zaffino noted, saying the company now needs to be just as savvy with Retalix's integration as it was with Radiant's.

In recent trade, shares in NCR were up 0.8% at $23.95, while those in Retalix were up two cents at $29.52 following a 35% surge Wednesday.

Write to Joan E. Solsman at [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires