Pentair Plc, urged by an activist investor to make acquisitions, agreed to buy U.S. electrical components manufacturer Erico Global Co. for about $1.8 billion including debt.
The all-cash deal is expected to close this year and add more than 40 cents a share to 2016 adjusted earnings, Manchester, England-based Pentair said Monday in a statement. Trian Fund Management, Pentair’s second-largest shareholder, said in a June filing that the company “can create significant value” for shareholders by spurring industry consolidation.
Solon, Ohio-based Erico makes specialty metal products for electrical, mechanical and civil applications. The business will become a source of growth within Pentair’s technical solutions segment, Pentair said.
The Erico deal “made good financial sense and is a good fit culturally,” Randy Hogan, Pentair’s chairman and chief executive, said by phone. “It’s very accretive right out of the box.”
Standard & Poor’s lowered its outlook for Pentair to negative Monday, and Moody’s Investors Service placed the company under review for possible downgrade.
Erico will increase Pentair’s debt ratio to about 3.4 times equity, compared with 2.9 times as of June 30, said Joel Levington, a senior analyst at Bloomberg Intelligence in New York.
The acquisition is the second-largest for Pentair and its fourth this year.
“The price doesn’t appear overly cheap,” Nathan Jones, an analyst at Stifel, Nicolaus & Co. in Denver, said in a research note Monday. “Pentair’s ability to make further acquisitions looks limited in the absence of equity raises.”
Pentair will continue to evaluate potential acquisitions in other industry segments, including flow control, and is actively looking at deal opportunities, Hogan said.
“We’re not going to step away from M&A,” he said.
Nelson Peltz, Trian’s chief executive and co-founder, lost a May proxy fight with DuPont Co., whose investors rejected Peltz’s attempt to get on the chemical maker’s board. Trian has a 7.2 percent stake in Pentair.
“Trian has said in a public forum that they like our structure and they’d like us to put it to use in consolidating,” Hogan said. The Erico deal is “consistent” with that aim, he said.
Anne Tarbell, a managing director at Trian, declined to comment on the deal.
Pentair rose 1.5 percent to close at $62.60 a share on the New York Stock Exchange. The shares are down 5.8 percent this year.
Pentair’s financial adviser on the deal is Goldman Sachs Group Inc. and its legal counsel is Foley & Lardner LLP. Erico’s financial adviser is JPMorgan Chase & Co. and its legal counsel is Jones Day.