Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Rare M&A participant Parker-Hannifin Corp. is striking while the iron's hot. 

The Cleveland-based manufacturer of motion-control technology is acquiring Franklin, Tennessee-based Clarcor Inc., which makes air and liquid filtration products used in everything from bus engines to oil drills as well as at manufacturing plants. At a total value of $4.3 billion, including net debt, this is by far 99-year-old Parker-Hannifin's largest acquisition.

Welcome to the Party
Parker-Hannifin unexpectedly announced its biggest deal ever after industrial mergers -- and even global dealmaking broadly speaking -- hit a near-record in 2015
Source: Bloomberg

Despite its own $19 billion market cap, Parker-Hannifin has stuck with mostly tiny deals over the past decade. But back in October during the company's first-quarter earnings call, CEO Thomas Williams hinted that something was brewing: 

"What historically the last couple of years has slowed us down as far as converting more acquisitions has been the price/valuation gap. And what we're seeing now -- and I would hope over the next couple of years we'll continue to see this even more -- is I think sellers' expectations coming closer to reality."

This is evident in Clarcor's share price and valuation over the past two years. Clarcor had sold off to as low as $44.29 a share in January, giving it an enterprise value equal to 10 times trailing 12-month Ebitda. That was way down from more than $65 a share or 15 times Ebitda in late 2014.

While Clarcor had bounced back in recent months, Parker-Hannifin's $83-a-share offer still looks pretty good. It's a decent 24 percent premium to Clarcor's average closing price over the past 20 days, but also 42 percent higher than its average price this year. 

Reality Check
The dip in Clarcor's valuation helped narrow the gap between the price wanted by the board and what Parker-Hannifin was willing to pay
Source: Bloomberg

The all-cash transaction also values Clarcor at 18 times trailing 12-month Ebitda, notably higher than a couple other recent deals for U.S. industrial manufacturers of similar size. Berkshire Hathaway Inc.'s $37 billion acquisition of Precision Castparts valued the aerospace-components maker at about 14 times Ebitda, while Rockwell Collins Inc.'s $8.3 billion offer for B/E Aerospace Inc. implies a similar multiple.  

However, unlike some other deals that came about in the M&A boom of the past couple years, Parker-Hannifin's bid price looks to be sound and strategically, it's a sensible move. Parker-Hannifin says Clarcor complements its own filtration offerings and bolsters its presence in a "growing and resilient business." Pollution control and air purification seem like industrial needs that probably aren't going away. The company projects annual cost savings of about $140 million starting from three years after the deal closes and the businesses consolidate their supply chains. 

Parker-Hannifin also has been generating a ton of cash and its $1.1 billion of net debt as of the latest quarter was less than its trailing 12-month Ebitda. 

Money to Spend
Parker-Hannifin converted 10% of its revenue into free cash flow in the past 12 months, which according to the company, puts it in the top quartile among peers
Source: Bloomberg

Since the post-election rally in industrial stocks in particular, Parker-Hannifin shares have blown past analysts' estimates. It also recently gave updated sales and earnings guidance for the year that was better than expected. And on Thursday, following the deal announcement, Parker-Hannifin traded at a record high. 

Breakout
Parker-Hannifin has rallied as tailwinds develop for the manufacturer:
Source: Bloomberg

Its careful growth planning and balance sheet discipline is turning this long-time Ohio manufacturer into a new investor favorite. In a time of otherwise rash M&A decision making, Parker-Hannifin stands out.

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

  1. As reported by Bloomberg News Wednesday, activist investor Starboard Value LP wants Rockwell Collins to consider dropping the deal and perhaps sell itself instead. 

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net