CIR - Circor International Inc.: Buyout Is Almost A Done Deal Awaiting Regulatory Approvals

2023-08-28 17:49:50 ET

Summary

• Private equity firm KKR is set to acquire global pump-and-valve manufacturer Circor International in a $1.7 billion deal.
• Circor's Q2 2023 revenue beat estimates and was up 9.11% YoY, indicating strong growth.
• KKR's offer of $56 per share, along with a ticking fee, was accepted over a rival bid from Arcline Investment firm.

Global pump-and-valve manufacturer, Circor International, Inc. ( CIR ) is set to be acquired by private equity firm, KKR in a $1.7 billion deal that is expected to close by Q4, 2023. KKR raised its offer to $56 per share to strike off a rival bid by Arcline Investment firm. Circor’s share price is up 205.22% (YoY) and is trading just 1.6% shy of the 52-week high of $56.48 indicating the market has priced in KKR’s transaction. Further, Circor’s Q2 2023 revenue of $208.81 million beat estimates by $5.71 million and was up 9.11% (YoY).

Thesis

Ahead of the KKR transaction to close in Q4 2023, Circor International continues to drive revenue growth with value pricing strategies, product cost controls, and margin expansion. The boosted investment from KKR in the quarter also points to Circor’s dominance in the flow-control technology space, aero-defense supply industry.

Quarter financial review

Of the $208.8 million revenue reported in Q2 2023, the aerospace/ defense segment contributed $74 million while industrial revenue stood at $135 million. Circor markets its flow control solutions using sales partners to over 14,000 clients. It has outlets in more than 100 countries and has built itself into a global brand.

Orders were up 13% (YoY) at $236 million in Q2 2023 primarily driven by the recovery of the commercial aerospace & naval defense sector post COVID-19. Circor’s backlog at the close of the quarter had surged 27% to a high of $604 million. However, Russian sanctions largely contributed to a 20% decline in GAAP operating income to $9.5 million and a decrease of 160 basis points or 4.6% in the operating margin. Still, the company was subject to intense competition in regards to the potential acquisition by the end of 2023.

Why KKR’s offer was better

Despite Arcline Investment Management offering a $57 per share acquisition offer to Circor International, raising the valuation to about $1.8 billion, Circor’s management accepted KKR’s offer at $56 per share. KKR was forced to raise its bid from an initial $49 per share to match Arcline’s offer until it stabilized at $56 per share.

To consolidate investors’ confidence, KKR included in the new offer a ticking fee of $1 per share. This ticking fee will only kick in when the deal fails to close by the end of October 2023. Additionally, the actual value of the deal would accrue on a prorated daily basis in November and December 2023.

As stated earlier, while Arcline’s $1.8 billion offer included debt, it carried the “ risk of a protracted review by antitrust regulators.” The antitrust risk does not entertain companies such as Arcline to enter into agreements with involuntary standards that may lock out competition. Still, while it is not unusual for private equity firms to compete over a pump maker in this case, Circor which has been around since 1999 has been in search of a buyer for at least a year. Further, the pump maker has been attracting lucrative industrial deals. In Q2 2023, industrial orders were up at $141 million against industrial revenue of $135 million in the quarter.

KKR’s bid was lower at $1.7 billion. However, to ensure the completion of the merger, KKR consented to an equity backstop. Unlike Arcline which would need to use debt syndication to fund the purchase, KKR would contribute up to 100% of its equity to fund the $1.7 billion purchase.

As of Q2, 2023, Circor's total debt stood at $547.9 million with liabilities and equity at $1.03 billion. It is safe to state that with the KKR's amended agreement, putting the share price at $56 is better to ensure financing certainty. Also, unlike Arcline, Circor's deal with KKR will ensure the merger gets quicker antitrust approvals. Even though Arcline's deal is at $57 per share, KKR's ticking fee of $1 per share between November and December covers the difference.

Risk

Circor's share price is pegged on its deal with KKR. Disapproval of the merger agreement by antitrust bodies will delay this acquisition and devalue the company. Further, Circor will not be releasing its Q3 2023 financial results with the hope that the merger agreement with KKR will follow through. Additionally, the $1 ticking fee will only apply until December 2023 meaning the agreement will face a different turn if it is dragged until 2024.

Bottom Line

At the moment, Circor is a hold. The company’s board is set on the merger agreement with KKR. Despite Arcline having a superior offer, Circor’s board has settled on KKR and all indications show the merger will sail through. The buy price of $56 is a premium and represents an increase of more than 320% from the 52-week low of $13.32. Additionally, the ticking fee of $1 matches Arcline’s offer of $57 with KKR coming out stronger with fewer antitrust risks and higher approval chances. However, I am waiting to see if the deal materializes by Q4 2023 for Circor to be taken private.

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