Wabco: Sold To German Company

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About: WABCO Holdings Inc. (WBC)
by: The Value Investor
Summary

Wabco has been sold to German-based ZF Friedrichshafen.

The deal seems to take place at a solid valuation, although the price is far below last year's highs.

Shareholders get a fair deal, but nothing more than that unfortunately.

Late March Wabco (WBC) announced that it has reached a deal, under which it will sell itself to privately-held German peer ZF Friedrichshafen AG. The premium looks reasonable at first sight, although markets have seen a strong performance in recent months at large. With the offer being quite a bit lower from the 2018 highs, we can conclude that the offer might be fair, but certainly is not a knock-out deal.

Nonetheless, it appears that accepting the offer is the only way to go for investors, as the wider automotive supplier sector continues to trade at relatively modest multiples amidst concerns about changes in the marketplace, peak auto, cyclicality and tariffs.

Deal Terms

Wabco will sell itself to ZF in an all-cash deal which values its shares at $136.50, valuing the equity of the company at a little over $7 billion. The 13% premium over the unaffected share price has been relatively modest, although the premium jumps to 23% if we look at the 90-day volume weighted average share price.

With the deal, the two technology suppliers to OEMs of automotive and commercial vehicles will combine their expertise in a rapidly changing marketplace. ZF has particular strength in driveline and chassis technologies, while Wabco is strong in vehicle safety, efficiency and fleet management systems, among others.

CEO Jacques Esculier recognised that the operating environment becomes ever more complex and it is ever more important to have all capabilities in-house given the rapid changes in technology and changes in the competitive field. New alliances are therefore needed, and this is what the deal delivers upon.

For investors, the deal terms look reasonable at first sight. After having been spun off in 2007 at around $50 per share just ahead of the financial crisis, shares fell to just $10 in 2009 during the crisis and to rise to the low $160s in early 2018. Concerns about the state of the market and tariffs resulted in shares falling to the low $100s in late 2018 as the actual purchase price looks perhaps fair, but certainly not a knock-out bid.

The Valuation

Halfway through February, Wabco reported its results for 2018. They were pretty solid, with sales up 15.9% to $3.83 billion, including a two percent tailwind from currency movements. Note that towards the end of the year, the company has seen real softness with currency-adjusted sales down 1.4% in the final quarter of the year.

For the year, the company reported GAAP operating margins of 13.4%, a 20 basis point improvement from the year before, as adjusted operating margins were down 70 basis points to 14.2% of sales. GAAP earnings came in at $7.43 per share, a seven cent reduction from the year before, as adjusted earnings improved a dollar to $7.87 per share. For 2019, the company guided for 1.5-6.5% local currency sales growth and adjusted earnings to be largely flattish at $7.60-8.10 per share.

The 52 million shares outstanding value the equity at $7.1 billion at the deal price of $136.50 per share. Net debt has been quite limited at roughly $200 million, although the enterprise value rises to $8.1 billion if pension liabilities are included as well. Based on the equity valuation of the very modestly leveraged business, investors in Wabco receive a 17.4 times multiple for their shares at the midpoint of the guidance for 2019. This is more in line with the rest of the market, yet it does not represent a knock-out valuation at all, certainly not as the business is not leveraged and given that the buyer can extract the synergies in its entirety for itself.

One has to recognise that the board has timed the repurchases relatively well in recent years, although it was aided by the general rise in the stock market. Since the summer of 2011, some 21 million shares have been bought back for $1.8 billion, for an average of $85 per share and change.

What Now?

It appears that the game has been played as automotive suppliers typically tend to trade at lower multiples, thanks to the rapid changes in the marketplace and the cyclical end markets, in what becomes an ever more complex operating environment, as recognised by both companies. In fact the greater complexity of the sector has been the key rationale behind this deal.

Reality is that investors should probably be happy with the deal terms, although the timing could have been a bit better with the benefit of hindsight if the deal was announced a year earlier. Nonetheless, the price offers a nice premium from the recent lows as it is probably time to move on with no triggers to extract a higher share price.

Disclosure: I/we 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.