Emerson Electric: Reported Private Equity Deal Further Simplifies Portfolio (NYSE:EMR)

Emerson Electric Shanghai Office

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Emerson Electric (NYSE:EMR) is not a company we generally cover, however readers might remember that the name came up in one of our recent articles about Whirlpool (WHR) and their $3 billion acquisition of InSinkErator from Emerson. We wrote about that deal and how we thought that it was a good deal, in the long-term, for Whirlpool and in recent months have thought that Emerson did a great job on the sale there. This is not an easy environment to engage in M&A deal-making for a number of reasons, but by striking a deal with a company with a rock-solid balance sheet like Whirlpool, Emerson was able to avoid any issues that have crept up in the various debt markets which finance deals. Whirlpool paid a rich price and was able to complete the deal with liquidity already on its balance sheet. Avoiding potential financing risks was a big plus there and allowed both the buyer and seller avoid issues and quickly close on that deal.

So when we saw rumors about Emerson now being involved in a deal to sell an even larger portion of its portfolio to private equity buyers recently, we put very little stock in the story. However, The Wall Street Journal is now reporting that a deal is going to be announced as soon as this morning whereby Emerson will be selling a majority stake (55%) in its climate-technologies unit for $14 billion. Blackstone (BX) is the buyer, but The Wall Street Journal is also reporting that Emerson will retain a stake of 45%.

The market is not frozen, but getting deals done is not easy right now.

What Exactly Is Emerson Selling?

It appears that Emerson has agreed to sell a majority of its commercial and residential solutions business, one of the company’s larger subsidiaries as measured by employees and sales. Making the unit even more attractive at this time is the fact that the majority of its business is in the Americas.

How Is This Deal Getting Done?

With debt markets intimidating companies right now and banks reluctant to extend more credit for M&A deals as they have a bunch of loans that have soured on their books from the time the financing was arranged to where they had the draw and are now unable to issue that bridge financing debt to the market for anything near their cost. With that said, asking the question should be the first thing any investor asks because this environment is very difficult to get anything done.

This deal, as is being reported, is a complicated one in that it hinges on a few sources in order to get the deal closed. First up is of course Emerson agreeing to roll equity it already has in the subsidiary by retaining a 45% stake moving forward – this, in our opinion, is the most important part of getting this deal done. Blackstone and co-investors are contributing roughly $4.4 billion in equity with around $5.5 billion in debt financing. Emerson is also providing a $2.25 billion seller note. While the most important part of this deal is that Emerson is rolling a ton of equity, it is important to note that Blackstone arranged the financing outside of the traditional banking system, which is something that not all buyers could do on their own ahead of time and in such a short period of time.

Investors will have to wait for the official press release to see exactly how much cash Emerson is receiving upfront, because they are deferring at least $2.25 billion of the sale price to later dates via the seller note, and we suspect that Blackstone is taking some cash out itself via fees and dividends (the only question is how they are doing that as they played the debt side of this deal too which gives them some flexibility on how they collect fees and/or dividends).

What This Could Mean For Emerson Moving Forward

Well, first off, this is another move by the company to streamline the portfolio, focus on businesses with faster growing prospects, and generate significant proceeds from sales. With the technology deal with Aspen Technology (AZPN), the previously discussed sale of InSinkErator to Whirlpool and the transaction with One Rock Capital Partners for Therm-O-Disc and now this deal, Emerson is becoming more and more a pure-play automation company. As Emerson makes this transition, it is accumulating cash that it will be able to redeploy into growth areas and hopefully reward shareholders by getting the market to assign a higher multiple to its shares moving forward.

Chart
Data by YCharts

The market has rewarded Emerson shareholders for the company’s M&A deal-making, as shares closed Friday down 5.99% year-to-date, with its 12-month total return being down 7.84%.

Our Final Thoughts

If this deal is happening as the reports suggest, and happening in the manner described, then we have one word: Wow. The fact that the company and Blackstone were able to come to terms on a deal, ignore their usual financiers and instead utilize another area of the lending industry and get billions needed in debt financing approved in order to close the deal is very impressive in our book. Assuming the financing is locked in (and keep in mind that this was not a little deal, in fact it was a pretty good size transaction) which makes the maneuvering by Blackstone that much more interesting, in our opinion.

This is the first big M&A deal, and the structure, while it might not be suitable for all deals moving forward, certainly lays the groundwork for copycats that may also avoid the banks to cut out the middleman right now and lock in financing from private lenders or markets. While the equity roll might be the most important piece of this deal, the debt financing is most certainly the most interesting.

If the banks are closed for business relating to financing M&A deal-making, then we think investors should take note of the structure of this deal and maybe increase the probabilities of some of their other stocks being purchased utilizing the same means. That is usually how capitalism and the finance world works. While we like the reported deal, we do want to see the final proceeds for Emerson, how much they are getting paid in interest on the seller’s note and the terms behind that note – such as how long it will take them to get paid back and the interest rate.

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