Ross Hawley – Head of Investor Relations – Edwards Group Ltd
Jim Gentilcore – Chief Executive Officer – Edwards Group Ltd
James Covello – Goldman Sachs
Atlas Copco Ab Ser A (OTCPK:ATLKY) Edwards-Atlas Copco Transaction Conference Call August 19, 2013 8:00 AM ET
Good day ladies and gentlemen, and welcome to the Edwards’ Atlas Copco Transaction Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference call is being recorded.
I would now like to turn the conference over to your host Mr. Ross Hawley, Head of Investor Relations. Please go ahead.
Thank you, Ally. Good morning everyone, and thank you for joining us on today’s conference call to discuss the announcement made this morning regarding the proposed transaction between Edwards and Atlas Copco. This call is also being broadcast live over the web and can be accessed by the Investor Relations section on the Edwards website. Earlier today, Edwards issued a press release relating to the definitive merger agreement signed today between Edwards and Atlas Copco Group. If you’d like a copy of the press release, you can access it on our website or the SEC’s EDGAR website.
With me on today’s call are Jim Gentilcore, Edwards’ Chief Executive Officer; and David Smith, Edwards’ Chief Financial Officer. Before we get started, we would like to remind you that during the course of this conference call, Edwards’ management may make certain forward-looking statements that involve risks or uncertainties.
Statements regarding the Company’s future financial and operating results, future market conditions, plans and objectives of management for future operations and any other statements other than historical information should be viewed as forward-looking and uncertain. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the Safe Harbor statements in the press release filed with the SEC and the Risk Factors described in the Company’s filings with the SEC. Unless stated otherwise, all information provided during this call is as of July 30, 2013. The Company assumes no obligation to update any forward-looking statement.
I would now turn the call over to Edwards’ CEO, Jim Gentilcore.
Thanks, Ross and good morning, and thank you very much for making this conference call on such short notice. By now, you all have seen the announcement from both ourselves and Atlas Copco relating to the signing of a binding agreement for the acquisition of Edwards, which will become the Vacuum Solutions division within Atlas’ Compressor Technique business area. This new division will be headquartered in Crawley, in the UK and include their existing rotary vane pump business. On this call, I’m going to run through the deal terms, the rationale and timetable before opening up for Q&A.
So starting with the headline, consideration will be in the form of an initial cash payment of $9.25 per share at closing and an additional cash payment of up to $1.25 per share once our 2013 year-end numbers are finalized. This additional payment is based on the business achieving revenue for the full 2013 calendar year about GBP587.5 million, with an adjusted EBITDA band of GBP113 million to GBP145 million.
At the top of the additional payment range, this would value the business at $1.6 billion, including the assumption of $400 million of net debt. When looking on a historic 30 day basis, where our average closing share price was $8.33 per share, the premium range is approximately 11% to 26% and this also represents an approximate premium of 16% to 31% to the IPO price from May of 2012.
As noted in the press release, Edwards shareholders representing approximately 84% of the current shares outstanding have entered into voting agreements with Atlas Copco to vote in favor of the merger and the Board has unanimously recommended the offer to all shareholders. Edwards will ask the shareholders to vote on the transaction at a special shareholders meeting to be set for early October.
Completion will be subject to a number of regulatory and antitrust filings, the given the fact that there was little overlap between the two businesses, it will be surprising if there were any material issues. We therefore would expect to be through this process in early 2014 and expect to close within the first quarter of 2014. I would note that given some of the jurisdictions we operate in and we’ll need clearance from, we won’t know for sometime what a more accurate closing date would be.
Before I go through the mechanics, I would just touch on the rational, which I think would deliver significant benefits for all our stakeholders. As we said in the press release, management’s believes, this is an attractive combination, given that Edwards and Atlas Copco have a complementary business fit and little market overlap.
At the same time, vacuum and compressor products have significant technology synergies and we can envision meaningful R&D collaboration as part of the Compressor Techniques business area. Both companies also show similar strategic direction with growth focused on technology leadership and best-in-class customer service. We are both number one or two in the markets we choose to address.
The benefits we can enjoy through the greater scale of being part of Atlas Copco can also help accelerate Edwards organic and inorganic growth opportunities, particularly through revenue synergies. Atlas Copco recognizes the growth opportunities in the semiconductor and related industries, and already provides compressors to wafer fabs worldwide. The incremental opportunities in general vacuum are even more compelling, add to all this plus the strong people and cultural fit.
We’re both long standing engineering and technology rich businesses and I know we will continue to deliver with the customer experience that has allowed both companies to enjoy our market leading positions. For these reasons, we believe this is a good deal for shareholders, customers and employees.
Let me now take you through the transaction terms in more detail and how we think about the additional payment. Atlas Copco is offering an upfront payment of $9.25 per share in cash, which will be payable at closing. On top of this, they will make an additional payment of up to $1.25 per share once full year 2013 results are available during the first quarter of 2014. The amount of the additional payment is arrived based on a multiplier of excess full year 2013 revenues over GBP587.5 million, subject to achieving 2013 adjusted EBITDA within certain qualifying ranges.
So to qualify for the highest range of $1.25 per share, Edwards must earn at least GBP145 million in adjusted EBITDA and GBP637.5 million in revenue. For the $0.75 to dollar range, we must earn GBP135 million of EBITDA and GBP625 million of revenue, and for the $0.50 to $0.75 range, the qualifying EBITDA is GBP132 million and GBP612.5 million of revenue. The two other steps are GBP122 million of EBITDA and GBP600 million of revenue and GBP113.9 million of EBITDA and GBP587.5 million of revenue.
Once the qualified range has been established, we’ve referenced to adjusted EBITDA, the exact additional payment is then calculated from revenues. This is defined as $0.01 of payment for each GBP0.5 million that revenue exceeds GBP587.5 million. With the cap of GBP650 million, which is at GBP62.5 million excess would produce a maximum of $1.25 of additional payment. Just to remember the additional payment is capped at the top of each range as qualified by the adjusted EBITDA test rather than the full revenue multiplier.
So to give you three quick examples; first in the case of adjusted EBITDA of GBP146 million and revenues of GBP651 million, the additional payment is $1.25 as the GBP146 million adjusted EBITDA exceeds the GBP145 million qualifying base for an additional payment at $1 to $1.25 per share, using the revenue multiplier, this would imply GBP63.5 million of excess revenues and just on the basis of revenue multipliers $1.27 of additional payment. This will however, be capped at the top of the range base at $1.25 per share.
The second example, should we have adjusted EBITDA of GBP142 million and revenue of GBP646 million, the additional payment would be $1 as the GBP145 million adjusted EBITDA threshold has not been met, but the next level down of GBP135 million has been met, implying $0.75 to $1 range. The revenue was high enough to get to the top of the $0.75 to $1 range, but it’s capped at that level.
Finally for an adjusted EBITDA of GBP146 million and revenue of GBP644 million, the additional payment would be $1.13 per share. Although the adjusted EBITDA for the top $1 to $1.25 bracket has been met, the revenue calculation only gives an excess over GBP587.5 million of GBP56.5 million, which therefore gives an additional payment of $1.13. For full details of the calculations will be available in the proxy statement.
At present, I would note that our analyst coverage after the second quarter produced the full year of 2013 consensus revenue forecast of GBP647 million and an adjusted EBITDA of GBP142 million. So if you guys are right, we would earn an additional payment towards the upper end of the range. We planned to use the proxy statement in early September – we planned to issue the proxy statement in early September, which will have full details of the transaction.
In conclusion, while we have enjoyed our current path as an independent listed company and I have personally enjoyed my chance to interact with this investment community again, the merits of the combination apply to all stakeholders gives me a strong sense of accomplishment for this management team and all of the Edwards’ employees who have made this possible.
Edwards has a long and proud history and much of this was as a division of a larger industrial group. And therefore I see this transaction is signaling the start of another, but somewhat familiar phase and what I am confident will be an exciting and successful future as part of the Atlas Copco team.
With that, I will open up the call for questions.
(Operator Instructions) Our first question comes from James Covello of Goldman Sachs. Please go ahead.
James Covello – Goldman Sachs
Great, guys. Thanks so much for taking the question. Good morning and congratulations on the transaction. I guess first question is kind of more of a philosophical question that certainly I think the deal is fair value. I don’t think there is a significant premium to what Wall Street would call fair value to this.
Can you walk us through the thought process of taking this transaction today versus going through the exercise of drawing down the private equity ownership over time and seeing what the fair value would be in the market as we get into a cyclical upturn in the equipment business kind of the trade-offs in your mine?
Jim, I think the first thing is that you’ve probably already seeing the strength of the Atlas Copco balance sheet, their ability to help us very quickly look at opportunities both organic and inorganic to grow this business. And I think we’ve all seeing that there will be some opportunities out there pretty quickly.
So I think the short answer is, the sooner we get started on this journey together, the better for both sides. The other path is a long path and as all of us have been in this business for a long time know, there is the cycle or two out there that’s very, very hard to predict that could make this certainly more uncertain two paths. So I think that’s the long and the short of it if you will.
James Covello – Goldman Sachs
No, that’s helpful perspective. And then just as a follow-up, did you pursue discussions with other parties or is the Atlas really the only party that you talked to about that?
No, I think when the proxy statements come out, you’ll be able to see in detail, the level and the breadth of other discussions that we did have.
James Covello – Goldman Sachs
And I would hold judgment and you can make your own judgment, but you will see that there were several other alternatives that were considered.
James Covello – Goldman Sachs
That’s really helpful. Thanks and congratulations again.
(Operator Instructions) And no further questions at this time. And I’d now like to turn the conference back over to Mr. Jim Gentilcore for any closing remarks.
Okay. I just want to thank all of you once again for your participation on this very exciting day for Edwards and for Atlas Copco. So thank you very much. Have a good day.
Ladies and gentlemen, this does conclude today’s conference. You may all disconnect and have a wonderful day.
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