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Shares of Molex Incorporated (MOLX) jumped upwards following the news that the Koch brothers have decided to acquire the company.

Shareholders in Molex stand to receive a more than fair premium for their holdings and are best to advise to tender at these levels.

The Deal

Molex announced that it has entered into a definitive agreement under which the company will sell itself to Koch Industries.

The privately-held Koch industries will pay $38.50 per share in cash for each Molex Class of shares.

The total deal value amounts to $7.2 billion as reported in the press release, including outstanding stock options and restricted stock.

At the close of the transaction, Molex will become a standalone subsidiary of Koch Industries and will be managed by the current management team. The headquarters will continued to be located is Lisle, Illinois.

Fred Krehbiel who is co-chairman of the board commented on the decision to sell the company, "After 75 years this was a difficult decision, but our board of directors and our family believe that this transaction, which follows a diligent and thorough review process by the board, provides outstanding benefits for all our stakeholders."

The deal has already been approved by the board of directors of Molex, as well as the board of Koch Industries. Members of the Krehbiel Family, as well as management of Molex, holding a combined 32% of the common stock and 94% of Class B stock, have already voted in favor of the deal.

The deal is subject to normal closing conditions, including regulatory and shareholder approval.

Valuation

Molex ended its fourth quarter with $722 million in cash, equivalents and short term investments. The company operates with $364 million in total debt, for a net cash position of around $358 million.

Full year revenues came in at $3.62 billion, up almost 4% on the year before. Net earnings fell by 13% to $244 million amidst increasing competition.

The $38.50 price tag, or $7.2 billion reported deal value, values operating assets of the firm at $6.9 billion. This values operating assets at 1.9 times annual revenues and 28 times annual earnings.

Molex paid a quarterly dividend of $0.24 per share, for an annual dividend yield of 2.5% based on the acquisition price.

Some Historical Perspective

Before the deal was announced, investors in Molex have hardly seen any returns over the past decade. Shares traded in a $30-$40 price range between 2003 and 2006, falling to lows of $10 in 2009. Shares steadily recovered to current levels of $30 before the deal has been announced.

Between 2010 and 2013, Molex has increased its annual revenues by a cumulative 20% to $3.6 billion. Net income tripled to $243.6 million in the meantime.

Investment Thesis

The news about this sizable news came unexpected but is more than welcomed by investors in Molex. The valuation at almost 2 times annual revenues and 28 times earnings is quite rich, and I don't see Molex creating so much value on a stand-alone basis in the short to medium term.

Suppliers like Molex are struggling as key customers including automotive as well as smart phone producers are consolidating, thereby hurting its competitive position and impacting prices and profit margins.

With the deal Koch Industries will further expand its industrial empire adding electronic, electrical and fiber-optic connectors. Other products being produces are sockets, antenna's and switches. Molex generates a significant portion of revenues from Apple (AAPL) being a supplier for connectors, used in mobile devices.

The empire of the Koch brothers is widely rumored to generate annual revenues North of a $100 billion, and should be able to generate synergies with existing businesses owned by the Koch's.

This does mean the end of a 75-year old industrial company. Molex will add to the Koch empire expanding its current offerings beyond Brawny paper towels and Dixie Cups. Other assets being held by the brothers include chemical operations, pipelines and fertilizer products. Back in 2005 Koch paid $13.2 billion to acquire Georgia-Pacific, thereby getting a hold of Angel Soft toilet issues, among others. Earlier this year, the brothers acquired Buckeye Technologies (BKI) in a $1.5 billion deal.

All in all, there are few reasons for shareholders to complain. Common shareholders will receive a 31% premium, while shareholders in the Class A shares (MOLXA) stand to receive a 56% premium. Sounds like time to celebrate to me if I were a shareholder in the stock.

At these levels, shareholders get a great exit-valuation for their holdings.

Source: Molex - Koch Offers Great Exit Premium For Struggling Company