Teledyne Technologies (NYSE:TDY) announced a very nice deal after the market closed on Wednesday as it made a nice acquisition of Bolt Technology.
The deal appears to be a very nice ¨Bolt-on¨ acquisition adding to Teledyne's long term growth trajectory and achievements in terms of margin gains. This strategy has already paid off big time for investors in the long run.
While the current valuation is not that excessive, I am only a buyer on significant dips to account for the lack of dividends, modest dilution and increase in leverage following the deal.
Highlights Of The Deal
The deal values Bolt at $171 million and has been unanimously approved by the board of directors of both companies.
Who Is Bolt?
Bolt has been incorporated in 1965 and has been a supplier of marine seismic energy sources as well as replacement parts. It services are used in the offshore exploration for energy.
The company furthermore manufactures underwater cables, connectors and even undersea equipment through its SeaBotix unit which are mini ROVs used for a variety of applications.
Teledyne's CEO Robert Mehrabian is very pleased with the deal seeing a complementary product portfolio between both businesses.
Teledyne did not provide a deal presentation (yet) following the acquisition of Bolt, nor did it specify expectations regarding anticipated earnings accretion or potential synergies.
For the past fiscal year, Bolt posted sales of $67.5 million which represented a 16% increase compared to the year before. The company is quite profitable as it posted earnings of $8.1 million for the year. Given the net cash holdings of nearly $23 million and the lack of debt, the company was quite cash rich.
The $171 million deal tag which already subtracts Bolt's cash holdings, represents a nearly 37% premium over Tuesday's closing price. This values the business therefore at 2.5 times annual sales and 21 times earnings. These appear reasonable numbers for the stand-alone business, given the reported historical growth while Teledyne stands to benefit from the potential synergies.
At the end of July, Teledyne posted its second quarter results reporting earnings growth on relatively flattish sales growth. The company ended the quarter with little over $103 million in cash and equivalents as the total debt position of $509 million results in a net debt position of little over $400 million.
This debt position is manageable but will increase towards the $600 million mark following the deal with Bolt. The current leverage is equivalent to roughly 2 times EBITDA and 3 times earnings which is not very high, but something to keep an eye on.
With 38 million shares outstanding which ended Wednesday's trading session at $97 per share, equity in the business is valued at $3.7 billion. This values equity in the business at 1.6 times trailing sales of $2.34 billion and 18-19 times trailing earnings of $200 million.
Steady Grower, Stable Business
Teledyne has demonstrated solid but stable growth in its operations over the past decade. Since 2004 the business has grown from a $1 billion revenue base to $2.3 billion on a trailing basis, growing sales at 8-9% per annum.
Earnings have risen as well towards the $200 million mark as after tax profit margins have steadily increased from about 5% of sales to 10% of reported sales. The company did witness a 10-15% dilution of the total shareholder base over this time period.
Earlier in August, Teledyne presented itself at the Jefferies Global Industrial Conference. The company describes itself as a high technology industrial business with a strong track record and management with a solid track record. The company is active in a range of highly engineered products, resulting in quite some diversification.
Digital imaging, aerospace and defense and the wider instrumentation businesses are all targeted, creating great diversification in end markets and on a geographical basis.
This transformation on balanced end-markets which add more value has resulted in higher gross margins, EBITDA margins and R&D investments in order to create this value. This transformation has paid off big time for investors. Shares traded at around $60 ahead of the crisis during which they fell to lows around $20 per share. Ever since shares have increased towards highs around $100 per share in a very steady manner.
Teledyne has a great business with long term returns aided by steady revenue growth and margin expansion. Greater margins are not only cyclical but also results from the deliberate decision to focus on higher margins, resulting in structurally higher margins.
As such the valuation at 18-19 times earnings does not seem that ridiculous, representing just a 10% premium versus the market given the track record. That being said, Teledyne has seen modest dilution in the share base over the past decade, something which the company partially wants to offset with a new $100 million share repurchase program.
Take notice that the business is racketing up some debt now with the deal and the new share repurchase program while shares do not pay a dividend. As such I only see real appeal at a 10% discount to market multiples at around 15-16 times earnings despite the strong track record. This translates into a target point in the $80-$85 region, a price area in which I will be an eager buyer.
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