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SKF to Buy Kaydon for $1.25 Billion in U.S. Expansion

SKF Headquarters
The headquarters of SKF AB is seen in Gothenburg. Photographer: Oliver Morin/AFP via Getty Images

Sept. 5 (Bloomberg) -- SKF AB, the world’s largest maker of bearings, offered to buy Kaydon Corp. for $1.25 billion to expand its U.S. operations and add velocity control products.

The Gothenburg, Sweden-based company will pay $35.50 per share in cash for Kaydon’s outstanding stock, representing a 22 percent premium to the closing price yesterday, it said in an e-mailed statement today.

SKF has said it wants to expand in North America as industrial growth and modest wage increases make the region more attractive for major investments this year than China. Ann Arbor, Michigan-based Kaydon, which makes industrial shock absorbers, gas springs and vibration isolation systems, generates 62 percent of its sales in North America.

“It’s a good deal for SKF,” Alexander Virgo, an analyst at Berenberg Bank, said in an interview. “You’ve got over 60 percent of sales generated in North America which in light of how well that economy is starting to do is a good thing.”

In 2012, Kaydon had sales of $475 million with more than 2,100 employees. Its products are used by customers in industries such as aerospace, defense, medical, wind energy, material handling and machine tools. SKF, which has more than 46,000 employees across 130 countries, opened its second U.S.- based Solution Factory in Cleveland last year.

U.S. Push

“This acquisition, combined with our other activities, investments and acquisitions in the last few years, shows our strong commitment to the North American market,” SKF Chief Executive Officer Tom Johnstone said today.

Kaydon’s products will be complementary to SKF and fill gaps in the company’s assortment, Johnstone said today on a conference call. There are no significant product overlaps and no plans for plant closures, he said.

Kaydon rose 23 percent to $35.53 in New York trading as of 11:58 a.m. local time. SKF was unchanged at 180 kronor in Stockholm trading, valuing the company at 82 billion kronor ($12.3 billion). Before today, the stock had risen 10 percent in Stockholm trading this year, compared with a 12 percent gain on the OMX Stockholm Index of Sweden’s 30 biggest listed companies.

The tender offer for Kaydon will start on Sept. 16. and the transaction is expected to close in the fourth quarter, the company said. SKF’s financial adviser was JPMorgan Chase & Co. and Reed Smith LLP provided legal counsel.

Alternative Proposals

SKF hasn’t talked with any Kaydon shareholders yet due to regulations, Johnstone said today. In a separate statement, Kaydon said it has the right to solicit third parties for alternative acquisition proposals through Oct. 15. Barclays Plc acted as Kaydon’s financial adviser.

“The proposed transaction represents a compelling value for our shareholders,’ Kaydon CEO James O’Leary. ‘‘We believe that this transaction represents an excellent strategic fit for Kaydon that will allow our market leading businesses to accelerate their growth strategies.”

Johnstone said in an interview this week that the U.S. is likely to become a more important market for SKF as its economy bounces back.

“You will see some repatriation of production in the U.S.” as shale gas will give the the country a comparable advantage in terms of lower energy costs and as labor costs will close the gap with Asia, he said. “It’s not suddenly going to make the U.S. grow like China used to, but it will give a more sustained level of growth for the U.S.”

Strong Krona

SKF is a barometer for the health of global industrial orders because its products are used by customers in construction, automotive, and aviation manufacturing as well as energy and mining. Its full-year sales fell 2.5 percent to 64.6 billion kronor in 2012.

SKF has also been expanding outside its home market to cushion the impact of the strong krona on earnings.

Sweden’s exporters have been harmed by the strong krona, which has appreciated 25 percent against the euro since early March 2009 at the height of the global financial crisis, hurting companies with production in Sweden and most of their sales in Europe. SKF said second-quarter profit was reduced by 200 million kronor because of currency moves.

While the krona has weakened from a low of 8.2861 in March this year and traded at 8.7163 against the euro yesterday, Sweden’s National Institute of Economic Research forecast the krona will move to 8.51 against the euro next year and 8.39 in 2015.

About 6.7 percent of SKF’s assets, including factories and production facilities, are based in Sweden, compared with 28 percent in North America and 41 percent in the rest of Europe, according to data compiled by Bloomberg.

To contact the reporter on this story: Janina Pfalzer in Stockholm at jpfalzer@bloomberg.net

To contact the editor responsible for this story: Simon Thiel at sthiel1@bloomberg.net

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