Rockwell Seen Assembling $16 Billion Deal: Real M&A
Stock Chart for Rockwell Automation Inc (ROK)
Rockwell Automation Inc. (ROK) is proving that demand for assembly-line components could pave the way for the second-biggest U.S. industrial acquisition on record.
The company’s profit from parts and technology used in factories that produce everything from cars to packaged food has made it a recurring subject of takeover speculation. Now, an industrial conglomerate such as Emerson Electric Co. (EMR) or Honeywell International Inc. (HON) may become interested, MKM Partners LLC said. Nomura Holdings Inc. said private-equity firms also could be drawn to Milwaukee-based Rockwell’s low debt and free cash flow yield, which topped 92 percent of manufacturing equipment providers, according to data compiled by Bloomberg.
Rockwell is projected to boost profit and revenue for a fourth straight year and offers the highest return on equity among makers of measurement-technology and factory automation controls. The $12 billion company, which also could appeal to Zurich-based ABB Ltd. (ABBN) as a way to expand its U.S. presence, may command a takeover price of about $115 a share, 31 percent more than last week’s closing level, shareholder New Amsterdam Partners LLC said. That would be the second-biggest deal for a U.S. industrial company, data compiled by Bloomberg show.
“They’re a high-quality, pure-play automation company and they have a sparkling balance sheet,” Shannon O’Callaghan, a New York-based analyst at Nomura, said in a telephone interview. “When you start talking companies that could be acquired, this is always going to be in the conversation because of those things.”
John Bernaden, a spokesman for Rockwell, wrote in an e-mail that “the highest value for Rockwell Automation shareholders will be realized by Rockwell Automation remaining an independent company and executing our growth and performance strategy. This is the viewpoint of our board of directors and management.”
Rockwell produces sensors, switches and lighting technology used to make factory operations safer and more efficient. Net income and revenue at the robotics manufacturer are poised to rise for the fourth straight year in fiscal 2013 to $753 million and $6.4 billion, respectively, according to analysts’ estimates compiled by Bloomberg.
“Rockwell is one damn good industrial automation business,” Brian Langenberg, principal and director of research at Chicago-based Langenberg & Co., said in a phone interview. “It’s attractive, it’s growing. They’ve run it well.”
Rockwell has been speculated as a potential takeover target since at least 2008, when Gabelli & Co. said the company could be attractive to strategic buyers after its stock price had declined. While a deal may not be imminent, Josh Pokrzywinski of MKM said suitors could be tempted to step forward amid a record buildup of cash at U.S. corporations.
“You could make the case that some of these larger-cap names may say, ‘Look, organic growth is underwhelming, but we generate a lot of cash. We don’t have a lot we can do with it, let’s look at larger deals,”’ Pokrzywinski, a Stamford, Connecticut-based analyst, said in a phone interview. “I do think that Rockwell plays into that notion really well and there are some strategic buyers who would look at Rockwell favorably.”
Rockwell’s return on equity, a measure of profitability, is the highest among peers, according to data compiled by Bloomberg. Rockwell’s rate of 36 percent last quarter compares with a median of 13 percent for measurement instrument manufacturers and automation controls and equipment makers valued at more than $1 billion, the data show.
That high rate of return, combined with Rockwell’s growth prospects, could be attractive to buyers, said Michelle Clayman, the chief investment officer at New York-based New Amsterdam Partners, which oversees about $2.5 billion including Rockwell shares.
Clayman said ABB, the world’s largest maker of power grids, would be the most likely buyer of Rockwell, lured by the chance to expand in the U.S. industrial market.
While ABB’s Joe Hogan said in February that the company wasn’t interested in purchasing Rockwell, the chief executive officer stepped down from his post last month and it’s unclear whether his replacement will feel the same way, according to O’Callaghan of Nomura.
“It’s always made sense,” he said of an ABB bid for Rockwell.
Rockwell’s focus on robotics and technology for the manufacturing of specialized goods such as medical devices and semiconductors would fill a hole for Emerson, whose operations in those fields aren’t as developed, according to Nick Heymann, a New York-based analyst at William Blair & Co.
“It’d be a totally complementary fit with virtually no overlap,” Heymann said in a phone interview. “The automation business for Rockwell is thriving today.”
Honeywell, a maker of cockpit controls and thermostats, could also be interested in a deal for Rockwell to bolster its automation businesses, Pokrzywinski of MKM said.
Representatives for ABB, St. Louis-based Emerson and Morris Township, New Jersey-based Honeywell declined to comment on whether their companies would be interested in buying Rockwell.
With relatively low debt and strong free cash flow, Rockwell could even appeal to private-equity suitors, according to O’Callaghan of Nomura.
Rockwell has $1.1 billion in debt, less than 10 percent of its market value, and boasts a free cash flow yield of about 7 percent, higher than all but two of 24 peers for whom information is available, according to data compiled by Bloomberg.
While the company is likely to appeal to suitors, Rockwell management has been successful at growing the business and may prefer to remain independent, he said. Chief Executive Officer Keith Nosbusch said at a conference last week that the company was seeking “catalytic” acquisitions to stimulate growth.
With the shares up 21 percent in the last 12 months, Nosbusch “has earned the right not to have to sell” if he doesn’t want to, Langenberg said. For potential buyers, “it’s a nice-looking girl that they’d like to go out with, but they’re not going to get there.”
The price tag of a potential deal may deter suitors, said Steven Soranno, a Bethesda, Maryland-based analyst at Calvert Investments Inc., which oversees more than $12 billion, including Rockwell shares.
Clayman’s estimated takeover price of about $115 a share would give Rockwell an equity value of $16.08 billion, making an acquisition the largest deal for a U.S. industrial company since Berkshire Hathaway Inc. bought Burlington Northern Sante Fe Corp. in 2010, according to data compiled by Bloomberg.
Today, Rockwell shares rose 3 cents to $88.05 at 9:53 a.m. New York time.
Still, Rockwell is small enough and its business is focused enough to be digestible for larger industrial conglomerates, said Pokrzywinski of MKM. Emerson has a market value of $41 billion, while ABB is valued at $51 billion and Honeywell at $62 billion.
“Their position as a pure play says they’re takeout-ready,” Pokrzywinski said. “To the extent they want to sell, there would be people lining up to buy.”
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