By: Scott Davis

The catalyst for this note was last week’s announcement that plastic equipment maker Milacron is being acquired by Hillenbrand for $2B. Four years after the June 2015 IPO, Milacron stock was still more than 30% below its IPO pricing of $20 and traded at all of 8.5x this year’s EBITDA.  Arguably depressed EBITDA as well.  Note, of the 20+ industrial IPOs we’ve been involved in over our careers, the vast majority of these deals have struggled and eventually ended up getting taken out or otherwise merged.  The $2B offer from Hillenbrand represents a 10x multiple and a more than 30% premium to the undisturbed stock price.  With financing rates sub 4%, almost any transaction at or under 12x EBITDA works in a deal model, whether it be strategics with actual synergies or private equity who can utilize higher leverage rates.

Public to private transactions seem likely at these levels. There are names we cover, and many more that we don’t, that would seemingly fit quite well with private equity. What’s held back those transactions has largely been cyclical concerns. However, with the Fed more likely to ease than not, we could have more macro visibility by the end of 2019, particularly if trade becomes less of a concern – whether it be with an actual deal or decreased tension. We believe the only thing holding back transactions to date has been cyclical concerns.  No one wants to do a deal, then have the model trimmed post close. So the key here is cycle stability…

M&A within industrials has mostly focused on growth the past 5 years.   With financing rates near zero and companies flush with cash (particularly post the recent tax bill), assets have traded hands at increasingly higher valuations. Though so far, these deals have largely been pricier offers for more attractive/higher growth assets. For example, Danaher/GE Biopharma at 17x EBITDA and 3M/Acelity at 15x. Given valuation spreads, we would expect some gravitation down the quality curve. The math is just too compelling – assuming the asset isn’t a total dud.

So what deals are possible?…

Report Here