Should You Buy Welbilt (WBT) Stock After Middleby Deal

Middleby (MIDD) has announced the acquisition of Welbilt (WBT) in an all-stock transaction. The deal values Welbilt at an enterprise value of $4.3 billion. As part of the deal, Welbilt stockholders will receive 0.124 shares of Middleby for every one WBT stock that they hold. Should you buy WBT stock after the Middleby deal?

Middleby Welbilt merger will create the leading food equipment business. The merger values Welbilt at a premium of 28 percent over its 30-day volume-weighted average price.

After the merger, Welbilt stockholders will hold a 24 percent stake in the merged entity while Middleby stockholders will hold the remaining 76 percent. The merger news led to a spike in WBT stock.

Welbilt stock rose sharply on Apr. 21 after the merger transaction was announced. The stock price rose to reflect the merger premium. However, it was trading down in early trading on Apr. 22, reversing some of the gains.

According to the estimates compiled by CNN Business, Welbilt has a median price target of $20 which is a discount of 7.9 percent over current prices. Its highest price target of $22 is similar to current prices while the lowest price target of $14 is a 35.5 percent downside.

That said, given the impending merger with Middleby, the forecast for Welbilt stock would also depend on the outlook for Middleby as the two stocks would trade in tandem in line with the stock merger ratio.

Middleby’s median price target of $210 is a 17 percent premium over current prices. Its highest price target is $225 which is 25 percent over the current stock price while its lowest price target of $169 is a discount of 6 percent.

Of the nine analysts covering MIDD stock, six rate it as a “buy” or some equivalent while three rate it as a “hold.” None of the analysts have a “sell” rating on the stock.

After the merger between WBT and MIDD stock, the merged entity would have a globally diversified footprint and enhanced product portfolio. The deal is also supported by activist investor Carl Icahn who is the biggest stockholder in Welbilt stock.

The merger would be earnings accretive immediately and would lead to an accretion of 10 percent by the second year after the merger. According to Welbilt, there is a “Clear path to driving $120 million in operational improvement with $100 million run-rate cost synergies and additional $20 million in Welbilt stand-alone Business Transformation Program annual improvement.”

The combined entity would have a combined 2020 revenue of $3.7 billion. Based on the current combined market capitalization of around $13 billion, this would mean 2020 price-to-sales multiple of 3.5x. The combined entity would also have a stronger balance sheet and the net leverage, which currently stands at 3x is expected to fall to 2.0x by the end of 2022. Looking at the expected synergies and the projected balance sheet improvement, WBT stock looks like a good buy. 

Given the impending merger, both the stocks would move in tandem with each other before the merger. The outlook for MIDD stock also looks positive.

There is not much discussion about the MIDD-WBT merger on Reddit. However, Microvision (MVIS) stock has been quite popular on the platform recently promoting the markets to speculate the possibility of a short squeeze in the stock.