Emerson acquires Pentair’s valves business
On August 18, 2016, Emerson Electric (EMR) announced that it signed an agreement to acquire Pentair’s (PNR) Valves & Controls business for ~$3.2 billion. Based on its trailing 12-month figures, the value of the deal was 1.9 times the sales and 14.1 times the EBITDA (earnings before interest, tax, depreciation, and amortization) of Pentair Valves & Controls.
From a multiple standpoint, Emerson stated it’s paying more than the three-year average multiple of 1.6x in sales and 10.1x in EBITDA to account for the fact that the business is now at the lower end of the business cycle. This is a 100% cash deal, and given Emerson’s cash holdings, the company should have few problems funding the acquisition.
Pentair manufactures filtration products for residential and commercial construction (XHB) projects as well as the municipal markets. The Pentair Valves & Control business came into existence in 2012 after Tyco (TYC) combined its flow control business with Pentair in a tax-free, all-stock merger. At that time, the flow control business was valued at $4.9 billion.
At its peak in 2014, Pentair Valves & Control had sales of $2.4 billion and an operating margin of 16.8%. In 2015, sales fell to $1.8 billion, and operating margins contracted to 12.1%. Pentair’s management had guided that sales in 2017 would be flat and profits would rise slightly year-over-year. However, David Farr, Emerson’s CEO (chief executive officer), disagreed and said the business hasn’t seen the bottom yet.
Strategic rationale for the acquisition
With the acquisition of Pentair Valves & Controls, Emerson will have a presence in pressure relief valves, a key product missing from its valve portfolio. The Valves & Controls business owns a number of world-class brands that are highly respected in the market. These brands are expected to enhance Emerson’s competitive position when it bids for projects. We’ll take a closer look at these aspects in the next part of this series.
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