Shares of AZZ Incorporated (AZZ) rose some 5.5% in Monday's trading session. The electrical equipment and components manufacturer announced the acquisition of Aquilex Specialty Repair and Overall. Monday's price action has boosted the year to date returns to 15%, despite the fact that the company recently lowered its full year guidance.
AZZ Incorporated announced that it has agreed Aquilex Specialty Repair, a leader in maintenance, repair and revitalization services to the nuclear and fossil power generation markets. The company furthermore serves refining and industrial markets.
AZZ will pay approximately $250 million in cash for the equity interest of Aquilex SRO. The purchase price will be adjusted for changes in working capital at the time of the closing of the deal. AZZ will buy the activities from Centerbridge Partners Limited Partners, a private investment firm.
CEO David H. Dingus commented on the deal, "Aquilex SRO is a great addition to AZZ's outstanding portfolio of brands and will be part of the Electrical and Industrial Products Segment. As with our recent acquisition of Nuclear Logistics Incorporated, it provides us with a recurring revenue stream during the full life cycle of a nuclear power generation plant, a fossil fuel plant, a waste-to-energy plant, a refinery or other industrial complex."
Aquilex expects to generate annual revenues of $225 to $250 million under the ownership of AZZ, valuing the firm at approximately 1.0 times annual revenues. The firm will take one-time transaction costs of approximately $5 million.
As a result of the deal, AZZ expects that the deal will be accretive to earnings by $0.25-$0.30 per share in the first year after the closing of the deal. The deal will add $0.60-$0.70 per share in earnings in the second year following the deal.
The deal is subject to common closing conditions, including anti-trust approval. The deal is expected to close within approximately 30 days.
AZZ ended its third quarter of its fiscal 2013 with $49.5 million in cash and equivalents. The company operates with $196.4 million in short and long term debt, for a net debt position of roughly $147 million. The $250 million purchase price will be financed with cash on hand, and a new bank credit agreement.
For the first nine months of its fiscal 2013, AZZ generated revenues of $430.2 million, on which it net earned $47.2 million. Last week, AZZ has lowered its full year revenue and earnings guidance. Full year revenues are expected to come in between $570 and $575 million. Full year earnings are expected to come in around $59 million, between $2.30 and $2.35 per share.
The market currently values AZZ around $1.1 billion. As such the market values the firm at approximately 1.9 times annual revenues and 18-19 times annual earnings.
AZZ Incorporated currently pays a quarterly dividend of $0.14 per share,for an annual dividend yield of 1.3%.
Some Historical Perspective
Shares of AZZ Incorporated have seen a great run over the past year, rising from levels around $25 in the first half of 2012 to highs around $45 at the moment.
Long term holders have seen even better returns. Shares more than ten-folded from lows of $4 as recent as 2004. Since the start of 2012, shares have even doubled. Between 2009 and 2013, AZZ increased its annual revenues by almost 40% from $412 million to $570-$575 million this year. Earnings rose with a similar percentage from $42 million in 2009 to an estimated $59 million in 2013.
Shareholders applaud AZZ's latest deal. The acquired activities will grow annual revenues by approximately 40-45%, to an estimated $825 million.
The price tag is very reasonable. AZZ will pay roughly $250 million for the activities, valuing the operations at 1.0 times annual revenues, which compares to a valuation of 1.9 times annual revenues for AZZ itself.
Factoring in earnings accretion of $0.60-$0.70 per share in the second year following the deal, annual earnings could increase by approximately $17 million. Based on these accretion estimates, the operations are valued at 14-15 times annual earnings, which compares to the company's own valuation at 19 times earnings.
The leverage ratio of AZZ increases as a result of the deal, but remains within reasonable levels. The activities are on track to generate annual revenues of $825 million on which the firm could earn $3.00 per share, or $75 million in two years time. Based on the current valuation of $1.1 billion, the market values the new AZZ at 1.3 times annual revenues and 14-15 times annual earnings.
The long term prospects of AZZ remain good, but the increase in leverage reduces the possibilities of further deals in the short term without diluting the current share base. Despite the fact that shares have doubled over the past year, the valuation remains within reason. I am a buyer if a correction takes place.