Toilet Maker May Suit Buyer Flush With Cash

With industrials desperate for deals, a Rexnord sale makes sense.

It's not often that urinals, drainage equipment and ball bearings are hot takeover commodities -- but this might be their year.

When the biggest U.S. industrial giants gathered this month to talk shop, their second-favorite word (after software) was M&A. With little revenue growth to be had the old-fashioned way, companies are looking to deals to grease sales and cut costs.

Build Me A Deal

Industrial companies have already been the target of almost $100 billion in takeovers so far this year.

Source: Bloomberg

Anything is a potential target, as Honeywell's $100 billion-plus offer for United Technologies earlier this year showed. So it's not totally surprising that what essentially amounted to minor corporate handbook tweaks sent one industrial company's shares rising as much as 7 percent on Wednesday.

Rexnord, a $2.1 billion company that, yes, makes urinals, drainage equipment and ball bearings, said late Tuesday it was changing its policy on how compensation and benefits are awarded in the event of a takeover. Change-in-control policies are fairly standard and updates don't mean deals are imminent, but the legalese is watched closely by those who speculate on M&A. In the case of Rexnord, an oft-cited target, there's reason to think buyers might take a look.

Rexnord explored a sale for all or part of the company back in 2013 (it has two primary businesses, motion control and water management), but the bids weren't as high as it wanted so it dropped the idea. Back then, it was valued at a higher multiple than about 90 percent of its peers and was sitting on a ton of debt loaded on by back-to-back private-equity owners.

Fast forward to today, Rexnord's debt has started to come down and it's laid out a strategy for cutting its holdings and focusing on takeovers it can pay for with free cash flow. Plans to transform into an industrial conglomerate with multiple strategic platforms haven't exactly panned out. Revenue is plodding along, at best, and dropped last year by the most since the financial crisis.  

Stairway to Nowhere

Before Wednesday's jump on M&A speculation, Rexnord was trading roughly where it was when it last explored a sale in 2013.

Source: Bloomberg

That's left Rexnord with roughly the same share price as when it explored a sale in 2013 -- even as the broader sector has climbed. A 30 percent premium to Rexnord's unaffected price would value it at about 10.6 times this year's projected Ebitda. That counts as a bargain these days: Danaher paid twice that for water-filtration firm Pall Corp.

With most industrials hungry for M&A, Rexnord is in a better position to name its price than three years ago. But it may still make sense to sell itself in pieces. Watts Water and Geberit are natural buyers for the plumbing assets, but probably won't have much interest in airplane parts. On the other hand, that latter business may interest the likes of Honeywell, which was foiled in its pursuit of United Technologies and should be in a position to shell out as much as $25 billion on deals, according to Bloomberg Intelligence.

If it plays its hand well, the humble toilet-maker could end up flush with cash.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Brooke Sutherland in New York at

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    James Boxell at

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