Weigh the Hillenbrand market for the acquisition of Milacron

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Sometimes the end of an opportunity marks the beginning of the next.

Milacron Holdings

(MCRN), a stock Barron Recommended purchases in December jumped 24 percent to $ 16.75 on Friday after diversified industrial company Hillenbrand (HI) agreed to acquire the plastics equipment maker worth about $ 2 billion dollars, including Milacron debt.

Milacron's shareholders will receive $ 11.80 cash and 0.1612 Hillenbrand shares for each Milacron share – a total value of $ 18.07, calculated on the basis of Hillenbrand's closing price prior to the announcement.

Milacron was trading at $ 12.39 when we recommended it, about 46% less than the agreed acquisition price. Hillenbrand investors seem less enthusiastic with the Milacron deal: the stock fell 13% to $ 33.87 on Friday. This reaction may be short-sighted.

Milacron manufactures machines used in the manufacture of plastic parts for cars, consumer goods and other products. It's a good deal, but the shares of the Cincinnati-based company remained under cloud of bankruptcy in 2009. It returned to the public markets in 2015, repaid its debt and carried out a process of restructuring of a year this year.

The restructuring has led Milacron to refocus on the faster-growing emerging markets, close unprofitable plants and streamline its structure and technologies. More importantly, it relies less on sales of capital-intensive and business-cycle machines. Nearly two-thirds of Milacron's revenue is now tied to equipment that needs to be updated or replaced with each new product cycle. Earnings per share are expected to reach 72 cents in 2019, up from 58 cents last year.

Hillenbrand, headquartered in Batesville, just 50 km from Milacron in the Indre, also sells equipment used in overlapping and complementary parts of the plastics value chain. About a third of its sales come from the manufacture of coffins, cremation coffins and other funeral products, in the shelter of the recession.

Companies expect annual savings of $ 50 million over three years and additional revenue synergies through cross-selling of complementary machines and after-sales services. The combined pro forma revenues for fiscal 2018 amounted to $ 2.9 billion, of which $ 502 million in Ebitda, being earnings before interest, taxes, depreciation and amortization.

The initial negative reaction to the transaction may be related to the debt: Hillenbrand is financing the cash portion of the purchase of $ 870 million through new borrowings and refinancing Milacron's $ 686 million debt. Companies Expect Net Debt to Adjusted Ebitda to Reach 3.6 Times, But Expect to Reduce Debt to Less Than 2.75 Times a Year after Signing Agreement, Which Should Be Completed early 2020.

Fund manager Chip Rewey, formerly of Third Avenue Funds and now Rewey Asset Management, owns the shares in Milacron. He said Barron he would have liked to see an offer approaching $ 20 per share, but is expecting to vote in favor of the deal. "The deal is largely profitable," he said, citing cost savings of $ 50 million, expected cumulative free cash flow of $ 325 million by 2021, and refinancing opportunities. Milacron's debt at 3.9%.

"I think you have a smart buyer who has done a good job of taking advantage of low rates by getting an asset that can deleverage very quickly," said Rewey.

This deleveraging could occur even more quickly if the company were able to divest its fluid business, which manufactures synthetic lubricants and coolants for industrial niche applications. Bloomberg had explored a sale last month up to $ 300 million.

The Hillenbrand stock recently went through a difficult period, falling to 37% below its 52-week high. But with Milacron poised to provide Hillenbrand with the expected double-digit EPS increase, improved profit margins, and a clear path to deleveraging, the stock could quickly recover.

Write to Nicholas Jasinski at [email protected]