E & I Engineering: Sales Of $460m But Bought For $1.8bn ?

[trajan]

Where I've been, the valuation of a business is principally based on its historic turnover with adjustment for things like debt, fixed assets and prospects in the foreseeable future.

So I'm really thrown by this $1.8 billion valuation put on E & I Engineering by its US buyers when its current Sales stand at only $460 million.

Now, I know a major international business acquisition has other components, not least synergy economies between the buying company and its acquisition and corporate tax benefits for a company based in Ireland.

But we are still on a times 4 multiple here and all the latter factors could never raise the price as high as that.
I note from here that E&I trades on a retained profit margin of 20% - 25% of its turnover.
So if its profits in the last year are around $460 / 4 ~ $115 million, that gives a valuation of ~ $1.15 billion on a 10% return on investment basis.
But we are still shy of the acquisition price by $700 million.

Can anyone involved in business valuation enlighten me here ?

 

[cremeegg]

Traditional valuation models mean little in the current interest rate climate.

a €1.8bn price tag on a €115m profit is about 6.4% return.

Vertiv are paying using cash on hand and borrowings. The cash was making nothing sitting in the bank. They are probably borrowing for far less than 6%.

 

[trajan]

That's a different perspective for sure.

Yet I wouldn't put Vertiv in the same category as say Microsoft or Facebook as regards cash pile driven acquisitions.
If they have a good cash pile it would surely be amply consumed by their giving keen prices in order to increase market share or doing US government work at knock-down prices just to win future favour.

But does this statement show a surfeit of cash or a strong trading position ?

 

[cremeegg]

I note

'At the beginning of March, we closed on a $2.2 billion term loan at LIBOR + 3.0% (4.0%)' So no need to project any synergy or growth to make it profit enhancing.

Also I would imagine that it was no fire sale. O Doherty didn't have to sell. Interesting that he took most of the consideration in cash, not a huge vote of confidence in Vertiv.

 

[trajan]

But looking at the balance sheet it's clear they have ~ $3.7 billion in long-term debt.
Statement of Earnings shows around $300 million going out on interest.
If the principal component of the debt repayments comes from retained profit, which is non-existent for last 2 years, then they can't be reducing it much. The selling, admin and general expenses looks fairly high at $1.1 billion . . .

Then the 2020 report looks no better from a comprehension point of view.
Somehow they've shook off about $1 billion in long-term debt but are still on a $327 million loss.

I don't know, I don't know . . .