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Summary

  • TE Connectivity makes a smart deal, aiming to acquire Measurement Specialties.
  • The deal adds growth prospects, margin expansion and long-term accretion.
  • Overall valuation of TE is fair given the modest track record, and shares offer appeal on dips.

TE Connectivity (NYSE:TEL) recently announced its intentions to acquire Measurement Specialties (NASDAQ:MEAS), gaining a strong foothold in the sensor markets in an accretive and smart long-term oriented deal.

Despite the excellent deal, the transaction will not move the needle enough to increase the overall appeal of TE. That being said, I'm a buyer on significant dips after the strong momentum in 2013.

Highlights Of The Deal

TE Connectivity announced that it has entered into a definitive agreement to acquire Measurement Specialties. Under terms of the deal, TE will pay $86 per share in a deal which values the company at $1.7 billion including the assumption of debt.

This means that TE Connectivity is offering a premium of just 10% for Measurement's shares, a key reason why shares of Measurement Specialties are trading higher in after-hours trading.

Measurement Specialties is a designer and manufacturer of sensors and sensor-based systems, which offers pressure, vibration, force, temperature and other sensors for a wide range of applications and industries.

The deal is expected to close during the calendar year of 2014.

Strategic Rationale

With the deal TE Connectivity is growing in the attractive and growing sensor industry. The deal allows TE to offer a greater range of connectivity and sensor solutions in an ever more connected world. The greater footprint, resources and engineering strength is expected to drive growth with real revenue synergies being anticipated. This is even as the company fails to quantify those synergies in the press release or the deal presentation.

TE Connectivity will become one of the largest sensor companies in the world following the deal in a still very fragmented industry. In the deal presentation, TE Connectivity stresses that the sensor market is growing at rate of 3 times the global GDP.

Financial Implications

Measurement Specialists expects to generate revenues of $540 million this year. The company has grown at a rapid pace, increasing its revenues by 26% per annum between 2010 and 2014.

The 19% EBITDA margins are steep with the deal expected to be accretive to revenue growth and gross margins. Given these margins, the deal is valued around 16 times EBITDA, which is not very cheap. The company has posted net earnings of about $38 million on a trailing basis.

Despite a high price tag, the deal is expected to be accretive to TE's adjusted earnings per share in the first year after closing by mid-single digits. On top of the strategic rationale which should drive revenues, cost and tax synergies are anticipated as well even as they have not been specified. Given the outlook for mid-single digits earnings growth, these anticipated synergies are rather sizable.

Valuing TE Connectivity

Back in April, TE Connectivity released its second quarter results. The ¨Swiss-based¨ company holds $1.43 billion in cash and equivalents, while operating with $3.00 billion in total debt. This results in a net debt position of $1.6 billion indeed.

The company guided for annual sales of $13.8 to $14.1 billion at the time. Non-GAAP earnings are seen between $3.72 and $3.84 per share, with GAAP earnings seen 10 cents lower.

Trading at $62 per share, TE Connectivity is valued at $25.3 billion. This values equity in the business at 1.8 times annual sales and 16-17 times annual earnings.

The company's quarterly dividend of $0.29 per share provides investors with a 1.9% dividend yield.

Some Historical Background

TE Connectivity is the former Tyco Electronics which once was part of the Tyco International Group. In 2007 the group was split off and shares commenced trading around $40 per share. Shares quickly fell to lows of $10 during the 2009 crisis and saw a recovery to the $30-$40 range in the years following. Strong returns in 2013 sent shares to current levels of around $60.

Revenues have been cyclical and they are still to recover to 2008's highs of $14.8 billion. The company has returned to steady earnings, on track to report its fifth year in a row when net earnings exceed a billion. This has been accompanied by very modest share repurchases, providing a boost to earnings per share.

Takeaway For Investors

The announced deal is modest, adding little less than 4% in annual revenues while being accretive to growth and margins. Yet the profit contribution is limited, but will still result in $0.04 to $0.06 accretion per share in the first year after closing.

While I do think TE made an excellent deal in the long run, the company is showing lack of consistent growth in recent years despite exposure to steadily growing aerospace industries and the economic recovery. The solid balance sheet and fair valuation are appealing, yet shares have already risen 35% over the past year amidst the general market optimism.

I will keep the company on my radar, after the interesting deal, looking to buy a quality name at discount if a general market correction might occur.

Source: TE Connectivity: Measurement Specialties Deal Smart By My Measures