Consistent with its strategic overhauling policy, announced in April 2011, business document storage and records management provider, Iron Mountain Inc. (IRM) may sell its Italian business unit, according to a recent Bloomberg feed.
As per its comprehensive strategic plan, Iron Mountain has taken a number of strategic initiatives to improve its profitability over the last year. This included a review of underperforming assets and business units and gradual divestiture of these units. In adherence to the policy, the company sold key assets of its under performing digital division and the New Zealand business in 2011.
We believe that a probable divestiture of the underperforming Italian unit will help Iron Mountain focus on its core business going forward. Although Europe contributes a large chunk of Iron Mountain’s international sales, growth in some regions, particularly Italy, has been sluggish in recent times. Over the last 12 months, the company has been facing tough macroeconomic conditions in the region that has resulted in significantly lower demand and order cuts from institutional clients, thereby hurting top-line and profitability growth.
Italy forms a very small part of Iron Mountain’s overall business and the asset disposition in the country will reduce the company’s exposure to the debt ridden European market without significantly hampering top-line growth, in our view. Moreover, we believe that the divestiture will generate significant cash flow, which the company may use to fund accretive acquisitions in the emerging economies of Asia-Pacific, Middle-East and Latin America.
We expect Iron Mountain to drive significant growth through acquisitions in the rapidly growing countries like Brazil, Russia, China and India, which will boost its international revenue going forward. We believe that this diversification and expansion of business will help the company to counter sluggish growth from the domestic and European markets over the long term.
Further emphasis on core business will help the company enhance shareholder wealth over the long term. The divestiture of underperforming units and assets will boost the company’s liquidity, which in turn will boost share buybacks and dividend activity going forward. Iron Mountain expects to return approximately $2.2 billion to shareholders through share repurchases and dividends by 2013.
We believe that Iron Mountain will continue to pursue growth opportunities in both domestic and international markets, which will help the company to achieve long-term targets of after-tax ROIC of 11.0% by 2013 (up from 7.7% in 2010), adjusted OIBDA margin of 32.0%, while lowering its capital spending to approximately 6.0% of revenue at the same time.
However, weak internal growth coupled with volatile foreign exchange rates are the primary headwinds going forward. We also believe that Iron Mountain may find it difficult to gain significant market share in the emerging economies due to strong competition from regional players going forward.
Thus, we remain Neutral over the long term (6-12 months). Currently, Iron Mountain has a Zacks #3 Rank, which implies a Hold rating in the near term.
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