Rexnord Split Seen Tempting Watts to Honeywell: Real M&A
Rexnord Corp. (RXN)’s review of its strategic options will probably spur the separation of its two units, providing takeover bait for suitors including Watts Water Technologies Inc. (WTS) and Honeywell International Inc. (HON)
Rexnord -- with one division focused on faucets and drainage equipment, and the other on industrial machinery parts such as gears and ball bearings -- said on Feb. 11 that it hired Goldman Sachs Group Inc. to consider selling all or part of the company. Apollo Global Management LLC (APO), the private-equity firm that remains Rexnord’s biggest shareholder, took it public in March with plans to expand beyond two industries.
Rexnord’s valuation may be too costly to attract a buyer for the whole company, Credit Suisse Group AG said. After rising 13 percent since its debut, the stock trades at a higher multiple to projected 2013 profit than 89 percent of peers, according to data compiled by Bloomberg. If the company breaks up, Watts or Geberit AG may buy the water unit, Janney Montgomery Scott LLC said. The other business could lure Honeywell or Emerson (EMR) Electric Co., Bank of Montreal said.
“There’s really no company that I’m aware of that would really be interested in the whole,” Ryan Connors, a Philadelphia-based analyst at Janney, said in a telephone interview. “It’s in Apollo’s interest as still the majority shareholder to sell them separately.”
Mark Peterson, Milwaukee-based Rexnord’s chief financial officer, didn’t respond to a phone message or e-mail seeking comment. Charles Zehren, a spokesman for New York-based Apollo at Rubenstein Associates Inc., declined to comment on Rexnord.
Apollo bought Rexnord, which was focused on precision- motion parts, in 2006 from private-equity firm Carlyle Group LP for $1.8 billion. The plumbing business was bolted on in 2007 through an acquisition. After an IPO was scrapped in 2008 because of the financial crisis, Rexnord finally went public last year through a $426 million offering.
Rexnord’s so-called process-and-motion-control unit generated 68 percent of sales last year and supplies parts for Boeing Co. airplanes and jet engines made by General Electric Co. The water business includes Zurn toilet fixtures and VAG water valves. During the IPO last year, the company said it planned to expand beyond these two industries through acquisitions.
“Our strategy is to build the company around multiple, global strategic platforms,” according to Rexnord’s IPO prospectus. “Over time, we anticipate adding additional strategic platforms.”
The company, which now has $2 billion in market value, has completed one deal since the IPO, buying Cline Acquisition Corp. in December for $19.7 million, net of cash and excluding transaction costs. Cline makes and repairs drive shafts, clutches and brakes.
Rexnord aimed to be a “great growth-by-acquisition” company, Scott Davis, a New York-based analyst at Barclays Plc, wrote in a Feb. 13 note to clients. “But results have generally been disappointing.”
On Feb. 11, Rexnord missed analysts’ earnings estimates for the second time in four quarters. It also announced that Goldman Sachs was hired to evaluate whether to sell the entire company, divest a unit or maintain the status quo. The review signals that Apollo wants to sell soon, Davis wrote. The investment firm had a 64 percent stake in Rexnord as of Dec. 31, according to data compiled by Bloomberg.
Since the IPO, Rexnord shares climbed 13 percent through yesterday. The stock was trading for 21 times projected earnings for this year, compared with a median multiple of 16.7 for North American industrial machinery companies valued at more than $500 million, data compiled by Bloomberg show.
Rexnord’s valuation makes it difficult to “comprehend how the sale of the entire company would attract tremendous interest,” Julian Mitchell, a New York-based analyst at Credit Suisse, wrote in a Feb. 11 note to clients.
Today, the shares fell 0.8 percent to $20.21.
Selling the two units to different buyers or parting with just one division are more likely scenarios, Charles Brady, a Boston-based analyst at BMO, said in a phone interview.
“Those two platforms are just very different in what they do,” he said. “The buyer of one platform might not be interested in the other.”
Revenue at the plumbing business is poised to benefit from a rebound in U.S. commercial construction, and buyers may be drawn to Rexnord’s brands and relationships with customers, Mircea Dobre, a Milwaukee-based analyst at Robert W. Baird & Co., said in a phone interview.
That unit may be easier for Rexnord to sell, and the most likely buyers are Watts Water and Geberit (GEBN), according to Connors, the Janney analyst.
Dean Freeman, the CFO of North Andover, Massachusetts-based Watts Water, said the company doesn’t comment on takeover speculation. Roman Sidler, a spokesman for Switzerland’s Geberit, also declined to comment.
The process-and-motion-control unit will benefit from industrial spending, which is “likely to continue to be pretty healthy for a few more years,” BMO’s Brady said.
Honeywell and Emerson “have the financial wherewithal” to buy that business, he said. “That possibility certainly makes sense.”
Rob Ferris of Morris Township, New Jersey-based Honeywell and Mark Polzin of St. Louis-based Emerson declined to comment.
The company’s leverage may complicate negotiations, Janney’s Connors said. With $2.1 billion in total debt, Rexnord is the only company among the 36 North American peers where debt exceeds stock-market value, data compiled by Bloomberg show.
“The debt load is massive,” Connors said. A buyer of either unit is “going to push back and try to take on as little of that debt as possible.”
After controlling Rexnord for years, Apollo is probably an eager seller, Covenant Review LLC’s Adam Cohen said.
The private-equity firm “needs to show they’ve exited investments in order to raise the next fund,” Cohen, who founded the New York-based credit-research company, said in a phone interview. “Strategic buyers can finance acquisitions cheaply, and it’s a good time for them to do deals. So, logically, it’s a good time to at least think about selling your company.”