Kaydon: Sale To SKF A Fair Deal For Both Parties

Sep. 5.13 | About: Kaydon Corporation (KDN)

Shareholders in Kaydon Corporation (NYSE:KDN) are celebrating Thursday after the diversified industrial company announced that it has sold itself to Swedish industrial conglomerate AB SKF.

The deal seems more than fair to both parties involved as the Swedish company pays a fair premium to Kaydon's shareholders, paid for by estimated synergies following the deal.

The Buyout

Kaydon announced that it has entered into a definitive agreement with Swedish AB SKF to sell the company for $35.50 per share in cash.

Including the assumption of debt, the deal values Kaydon at $1.25 billion. The price tag represents a 22% premium over yesterday's closing price.

Kaydon produces many industrial products including bearings, springs and shock absorbers with some 2,100 workers on the payroll. With the deal, SKF demonstrates its commitment after making previous acquisitions and investments in the continent.

Over the past twelve months, Kaydon reported adjusted EBITDA of $98 million, valuing the business at 12.7 times that metric.

The deal is subject to normal closing conditions including regulatory approval and is expected to close in the fourth quarter of this year. Shareholders will also receive the quarterly dividend of $0.20 per share, declared in July. The board of Kaydon has already unanimously approved the deal.

Kaydon still has the right to solicit third parties with alternative proposals until the 15 October deadline at which the "Go-shop" period ends.


Kaydon ended its second quarter with $69.9 million in cash and equivalents and $164.7 million in total debt for a net debt position of around $95 million.

Revenues for the first six months of the year came in at $228.0 million, down 5.3% on the year before. Net income fell by 6.1% to $22.4 million in the meantime. At this pace annual revenues are seen around $450 million on earnings around $45 million.

The $35.50 offer values Kaydon's equity at $1.15 billion and the entire business at $1.25 billion. As such assets are valued around 2.8 times annual revenues and 28 times annual earnings.

Kaydon pays a quarterly dividend of $0.20 per share, as shareholders stand to receive one more dividend, representing an annual yield of 2.2%.

Some Historical Perspective

Long-term holders of the shares have seen very modest returns. Shares rose from the low twenties in 2003 to peak around $60 in 2008. Ever since, shares have traded in a $20-$40 trading range before SKF stands to acquire the company at $35 per share.

Between the calendar year of 2009 and 2012, Kaydon has grown its annual revenues by a cumulative 8% to $475 million. The company reported steady profits with the exception of last year after taking $43 million in one-time charges.

Investment Thesis

In all honesty the deal seems fair for both parties involved. Shareholders in Kaydon get more than fair value as the business is valued at 28 times annual earnings and a fat 13 times annual EBITDA ratio. This is even more the case, taking into account the declining revenues and earnings for the first six months of the year.

SKF will get a fair deal as well, getting a hold of a strong product portfolio in North America, which includes velocity control products as well as environmental services. While the price tag seems a bit rich on a stand-alone basis, the Swedish company sees attractive synergies following the deal.

SKF sees $30 million in annual cost savings, while revenue synergies could total some $50 million as Kaydon's products could also be distributed from its own network.

Adjusting for some $35 million in pre-tax incremental profit synergies, the earnings multiple will come down significantly, warranting the premium which SKF is paying at a rich 13 times EBITDA.

All in all, this a good deal for both parties involved in the deal. Shareholders in Kaydon receive a nice premium for their holdings in a company which has been struggling for a long time, as Kaydon is too small to operate on a standalone basis in a global world.

SKF pays a nice premium, although it timed the purchase well after recent weakness over the past year. The Swedish company gets a nice addition which bolsters its North American operations at a very acceptable price, taking synergies into account.

Seems to me that there are two winners to this deal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.