Emerson Electric Co. (IW 500/52) agreed to buy Pentair Plc’s valves and controls business for $3.15 billion in cash, broadening its focus on industrial automation under a year-old plan to overhaul operations.
The unit will complement Emerson’s existing valve and actuation business and lead to cost savings, Chief Executive Officer David Farr said on a conference call August 18. The Pentair unit serves customers across the chemical, power, mining and oil and gas industries.
“It really gives us a much stronger hand,” he said. “We can take the best of each of our businesses and really have a strong growth opportunity.”
Emerson dropped 3.4% to $52.66 at 9:57 a.m. Friday in New York after two analysts downgraded the company’s stock. Pentair fell 1.9% to $65.24. Emerson shares gained 14% this year through Thursday, while Pentair surged 34%.
The purchase extends a portfolio overhaul at Emerson that includes the recent sale of businesses for $5.2 billion. The St. Louis-based company, which makes products such as garbage disposals and wireless meters for pipelines, announced a plan in June 2015 to cut costs and exit underperforming operations.
Emerson has faced headwinds this year from a sluggish global economy, causing the company to fall short of analysts’ fiscal third-quarter profit estimates and to lower its adjusted-earnings target for the year.
“The purchase of Pentair’s Valves & Controls business adds definitive risk to Emerson’s earnings over the next several years,” Buckingham Research Group analyst Joshua Pokrzywinski said in a note. He cut the company’s rating to underperform from neutral and lowered his target price to $44 from $49.
“We believe the strategic overlap is less than ideal,” Pokrzywinski said. The acquisition has aggressive targets for the margin potential of the valves business, he said. Credit Suisse downgraded Emerson to neutral from outperform while leaving its price target at $57.
“Investors will be rightly cautious of this pitched ‘strategic deal’ at the wrong time of the cycle,” Stifel Nicolaus & Co. Inc. analyst Robert McCarthy said in a research note in which he maintained his buy rating. The company’s shares are likely to struggle Friday, “given the perception that Emerson has caught a falling knife in the same general end market where it struggled for the past two plus years.”
Emerson agreed this month to sell a network-power division to Platinum Equity and other investors for $4 billion while unloading businesses making motors, drives and alternators to Japan’s Nidec Corp. for $1.2 billion.
The Pentair unit, based in Schaffhausen, Switzerland, has suffered from a slump in the global process-automation market that could lead to order declines next year, Farr said. Sales in Pentair’s valves and controls business fell 23% last year to $1.8 billion as the price of oil declined.
“I fundamentally believe we have not bottomed in this space,” Farr said. The Pentair transaction represents an “opportunity to buy at the low end of the cycle.”
The deal boosts Emerson’s share of the $105 billion process automation market to 9% from 7% while almost doubling its piece of the $29 billion final-control industry to 13%, the company said.
Pentair plans to use the proceeds to repay $1.5 billion in debt and fund acquisitions in areas such as water quality, filtration and equipment protection. All three remaining Pentair units have attractive opportunities to grow through acquistions, CEO Randall Hogan said in a conference call Friday.
“We’ve been on the defensive a little bit now for a while because of our balance sheet,” Hogan said on a conference call Friday. “Now we can get back on the offensive.”
Share buybacks are also a possibility for Pentair, which has been a target of activist investor Nelson Peltz’s Trian Fund Management. Pentair bought the valves and controls unit in 2012, in an all-stock merger with the flow-control business of Tyco International Ltd.
Emerson said it expects to boost the operating profit margin in the final-control business to more than 18% on sales of $4.5 billion.
Pentair’s valves and controls unit has almost 7,500 employees. The deal will add its Anderson-Greenwood, Crosby, Vanessa, Keystone and Biffi brands to Emerson’s lineup of Fisher and Bettis products.
The transaction, which is subject to regulatory approval, is expected to close in the next four to six months, Emerson said in a statement. The integration team will be led by Ed Monser, Emerson’s president.
Greenhill & Co. served as financial adviser to Emerson while Davis Polk & Wardwell was legal adviser. For Pentair, Citigroup Inc. and Goldman Sachs Group Inc. worked as financial advisers, with Foley & Lardner providing legal counsel.
While larger deals in excess of $10 billion are off the table for now, Emerson will continue to scout other potential purchases, Farr said. “This will not be the last deal that we do because we still see opportunities out there,” he said.
by Richard Clough and Dagney Pruner. With assistance from Niclas Rolander and Rachel Layne.