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Shares of Brady Corporation (BRC) started 2013 on a strong note. The manufacturer of identification solutions and specialty materials announced the acquisition of Precision Dynamics Corporation at the start of the trading week.

The Deal

Brady Corporation announced that it has agreed to acquire Precision Dynamics Corporation in a $300 million all-cash deal. PDC is a leader in identification products in the healthcare market, including patient wristbands, specialty labels and other identification systems. The company's products reduce medical errors by integrating patients data.

The company, founded in 1956, employs approximately 1,000 workers. Its products are used by most US hospitals and have met all the important safety guidelines.

CEO Frank M. Jaehnert commented on the deal, "The acquisition of PDC, a leader in the US healthcare identification space, provides an important anchor position for Brady in the attractive healthcare market and fits well with our mission. PDC's highly regarded management team comes with deep experience in the healthcare identification space and has been very successful in building PDC into the strong business that it is today."

PDC reported annual sales of $173 million, which makes the deal value the firm at 1.7 times annual revenues. Brady expects the deal to be slightly accretive for the fiscal year of 2013, and add $0.10-$0.15 per share in the first fiscal year after the closure of the deal.

Brady expects to take a one-time non-cash charge of $25 to $30 million as a result of cash repatriation charges. The company will furthermore take between $8 and $12 million in acquisition-related expenses.

PDC was previously owned by Water Street Healthcare Partners, a strategic private equity firm which is focused on the healthcare industry.

Valuation

Brady ended its first quarter of its fiscal 2013 with $321.3 million in cash and equivalents. The company operates with $320.9 million in short and long term debt, for a flat net cash position. As such, Brady has sufficient financial flexibility to finance the deal.

For the fiscal year of 2012, Brady generated annual revenues of $1.32 billion. The company net lost $17.9 million for the year after taking a large one-time charge. Excluding the charges, net income would have come in around $110 million.

The market currently values Brady at $1.77 billion. This values the firm at 1.3 times annual revenues and roughly 16 times adjusted annual earnings.

Brady Corporation currently pays a quarterly dividend of $0.19 per share, for an annual dividend yield of 2.2%.

Some Historical Perspective

Shares of Brady started 2012 around $33 per share falling to lows of $25 during the summer after lowering its full-year outlook. Shares steadily recovered, currently exchanging hands at $35 per share.

Over the past five years, shares have traded in a wide $15-$35 trading range. Shares fell to lows at the start of 2009 and recovered, trading in the $25-$35 trading range for most of the time thereafter. Between 2009 and 2012, Brady generated a 10% increase in annual revenues coming in at $1.32 billion last year.

Investment Thesis

Shareholders in Brady applaud the deal, as shares trade with gains of 3.9% so far in 2013. The deal is significant, adding roughly 13% in annual revenues. The deal values Precision Dynamics at 1.7 times annual revenues, compared to a 1.3 times revenue multiple for the company itself.

Brady expects to see its earnings increase by $0.10-$0.15 per share as a result of the deal, increasing net earnings by $5 to $8 million. Judging from the expected accretion, Precision Dynamics is less profitable than Brady itself.

The deal will increase Brady's annual revenues to roughly $1.5 billion. Net earnings on a pro-forma basis could come in around $120 million, or almost $2.40 per share.

Shares are fairly valued around these levels, but I do not see convincing reasons to pick up some shares, after the 40% rally since the summer. The deal with Precision Dynamics seems to be executed at fair valuation levels, but the overall valuation of Brady is not appealing enough. Shares trade at 16 times annual earnings while paying a 2.2% dividend yield, which is not appealing enough. Furthermore, short to medium term upside might be limited after shares have already rallied over the past six months.

I remain on the sidelines.

Source: Brady Corporation Starts The Year Well By Acquiring Precision Dynamics Corporation