Cooper Decade-High Bid Price Turns Hubbell into Target: Real M&A
The takeover of Cooper Industries Plc at the highest price tag for an electrical-equipment deal in more than a decade is turning Hubbell Inc. (HUB/B) and Acuity (AYI) Brands Inc. into the next potential targets.
Eaton Corp. agreed this week to buy Cooper, the maker of products from LED lighting to industrial circuit breakers, for $12.8 billion including net debt in the biggest electrical-components, electronics or diversified-manufacturing acquisition since 1999, according to data compiled by Bloomberg. With ABB Ltd. (ABBN) also buying Thomas & Betts Corp. this year, the wave of consolidation may sweep up Hubbell, another large independent U.S. electrical company, said Macquarie Group Ltd., or Acuity, the biggest U.S. lighting-fixture maker, said JMP Securities.
Hubbell, with a market value of $4.7 billion, and Acuity at $2.3 billion are both projected by analysts to post record profit next year as non-residential U.S. construction increases. Further improvement in the commercial building market next year will help drive takeovers of electrical-equipment companies, said Macquarie. Siemens AG (SIE), Schneider Electric SA (SU) and General Electric Co. will be among the potential buyers, according to Longbow Research.
“One of the obvious targets out of the U.S. is gone, so there’s scarcity value in what’s remaining,” Shawn Severson, a San Francisco-based analyst at JMP, said in a telephone interview. “In lighting, now you only have two choices: Acuity and Hubbell. And in electrical products, you’ve got one choice really and that’s Hubbell.”
Today, class B shares of Hubbell rose 51 cents to $79.83, the highest closing price in three weeks. Acuity dropped 1.8 percent to $53.67.
James Farrell, director of investor relations for Shelton, Connecticut-based Hubbell, didn’t respond to phone and e-mail messages seeking comment. Dan Smith, a senior vice president and treasurer for Acuity, declined to comment on whether the Atlanta-based company has been approached by any buyers.
A spokesman for Schneider, which is based in Rueil-Malmaison, France, near Paris, and Andrew Williams, a spokesman for Fairfield, Connecticut-based GE (GE), declined to comment on whether the companies are interested in a deal in the electrical-components space or are considering a takeover of Hubbell or Acuity. Wolfram Trost, a spokesman for Munich-based Siemens, also had no comment on possible takeover targets.
On May 21, Eaton said it will acquire Cooper to expand its power-management business, tap into a U.S. construction recovery and diversify further away from auto parts. Zurich-based ABB, the world’s largest maker of power-distribution equipment, agreed to buy Memphis, Tennessee-based Thomas & Betts in January for $3.9 billion to build its presence in the U.S. low-voltage market.
Rebound in Construction
The Architecture Billings Index, an indicator of American construction activity, had shown increased billings for non-residential construction in five straight months before declining in April.
“Early leading indicators are pointing to flat to modest growth six months out” for non-residential construction, Mike Wood, a New York-based analyst with Macquarie, said in a phone interview. “The fact that we’re at or near trough levels currently, particularly in the construction market, would speak to accelerating consolidation as we get further along.”
Acuity, Hubbell and Cooper are among the four largest commercial lighting companies, which together command about 70 percent of a market that will grow as non-residential construction rebounds, said Wood. The fourth is a unit of Koninklijke Philips Electronics NV. (PHIA)
Revenue for the North American commercial-lighting market is forecast to rise more than 50 percent to $17.5 billion in 2015 from $11.5 billion last year, according to an Acuity slide presentation this month.
Acuity, which says it has the largest share of the commercial indoor, outdoor and emergency lighting market, reported fiscal 2011 sales of $1.8 billion, the highest in three years. Analysts estimate net income will climb 45 percent from last year to a record $153 million in fiscal 2013.
“Acuity is an attractive asset because it’s a dominant player in the North American lighting business,” said JMP’s Severson. “People understand now that the value is in the fixture and in the systems, not in the bulbs.”
Still, Acuity’s singular focus on lighting systems may deter potential buyers, said Joel Levington, a managing director of corporate credit at Brookfield Investment Management Inc. in New York. The range of Cooper’s products, from industrial circuit breakers to fuses and voltage regulators, made it attractive to more companies, he said.
Europe Needing U.S.
“I’m just not sure if there’s a pure player that would want lighting,” Levington said. “You would have to look to a General Electric or Philips as the most strategic acquirers of Acuity.”
Silvie Casanova, a spokeswoman for Amsterdam-based Philips, declined to comment immediately.
Hubbell, which makes lighting products, as well as electrical and power systems, would be attractive for a European company looking for more revenue from the faster-growing U.S. market, Ajay Kejriwal, an analyst at FBR & Co. in New York, said in a phone interview.
“Having a local company that has the products and the channel partners is a big advantage,” Kejriwal said.
After the takeovers of Cooper and Thomas & Betts, Hubbell is now the only comparable diversified electrical-equipment maker available for acquirers, according to Kejriwal. Hubbell’s $4.7 billion market capitalization would make it a smaller target than Cooper, said Wood at Macquarie. Profit is projected to rise 26 percent to a record $338 million in 2013 from last year, data compiled by Bloomberg show.
“There are very few core electrical-equipment companies remaining as potential targets,” Wood said in a phone interview. “Hubbell is more digestible than Cooper. They overlap with Cooper on a majority of product lines.”
Hubbell’s Class A shares control 73 percent of the voting power, according to its annual report. Almost half of the Class A shares are owned by the Harvey Hubbell and Louie E. Roche trusts, which may prevent a takeover, said Nick Heymann, a New York-based analyst with William Blair & Co.
“That has been the hurdle in why Hubbell hasn’t been acquired so far,” Heymann said in a phone interview.
Still, Hubbell is an attractive enough asset for a buyer to try to negotiate a deal with the controlling family trusts, FBR’s Kejriwal said.
‘Push Up Valuations’
Eaton’s cash-and-stock offer for Cooper valued the company at $72 a share when it was announced, a 29 percent premium to the stock’s closing price on May 18.
Including net debt, the deal also valued Cooper at 14.2 times its earnings before interest, taxes, depreciation and amortization in the last 12 months, more than 24 percent above the median for takeovers greater than $1 billion in the electrical-components, electronics and diversified-manufacturing industries, data compiled by Bloomberg show. The acquisition of Thomas & Betts, which closed last week, was 10.3 times Ebitda.
With fewer companies left as possible targets, Hubbell or Acuity could command an even higher valuation than Cooper, said Kejriwal.
“The valuation is a function of what the buyer wants to pay and the availability of assets,” he said. “There aren’t as many large, high-quality assets out there, so I think that will push up valuations.”
‘Lots of Cash’
With a potential U.S. construction rebound and steady profits in the electrical-products market from maintenance spending, the largest companies in the industry may look to expand through acquisitions, said Eli Lustgarten, an analyst with Independence, Ohio-based Longbow Research.
Siemens has almost $12 billion in cash and short-term investments, and Schneider has about $3.6 billion on that basis. GE, which also runs a finance unit, holds $83.7 billion in cash, excluding short-term investments.
Electrical equipment is “a highly profitable sector with good long-term growth,” Lustgarten said. “Most major manufacturing companies have pristine balance sheets, lots of cash and are in a slow-growth environment. So, strategic acquisitions make a lot of sense.”
Schneider held preliminary talks with Tyco International Ltd. last year, Bloomberg reported in April 2011, citing people with knowledge of the matter. Schneider also said that month that speculation had included a possible deal with Cooper.
‘Building Buildings Again’
Jeffrey Immelt, GE’s chief executive officer, said at the Electrical Products Group conference in Longboat Key, Florida, yesterday that his company would look at acquisitions of $1 billion to $3 billion. Siemens is interested in “bolt-on” acquisitions that can be worth “a couple of billion” dollars, CEO Peter Loescher said at the same conference.
Electrical-product makers are becoming increasingly attractive because of the need to retrofit lighting systems with more energy-efficient designs, a focus on smart-grid upgrades that will better manage power usage and a potential rebound in new construction, JMP’s Severson said.
“We’re going to start building buildings again, so you would be buying at the bottom of the cycle,” JMP’s Severson said. “Looking at North America, you would be in front of recovery in non-residential and residential construction, which is going to benefit both electrical products and lighting.”