Emerson gauges PE interest in network power, sources say
* Buyers lukewarm on valuation
* Declining financials an issue
Emerson Electric (NYSE:EMR) has held soft conversations with prospective buyers of its network power business since late last year, said four sources briefed on the matter.
A number of private equity firms have been evaluating the business, but the sponsors have shown lukewarm interest in the assets, these sources said. There may also be a short list of strategics interested in the network power unit, one of the sources added.
In June, Emerson announced plans to spin off network power. It concurrently announced it would be exploring strategic alternatives for its motors and drives, power generation and remaining storage businesses.
The industrials group is not running a formalized sale process for network power, the sources said. Still, they said Emerson appears to prefer a sale.
JPMorgan and Centerview Partners are advising Emerson. The transactions are expected to be completed by 30 September, the company’s fiscal year end.
In response to a question regarding the timeline of the network power separation, Emerson CEO David Farr said on the company’s fiscal 1Q16 earnings call last week that there was no delay. He noted that the company can go down the path of looking at strategic buyers for the business or pursue a straight spin.
Emerson noted in its most recent 10-Q that the company has received inquiries which could potentially lead to separation of the network power systems business through a sale.
Several of the sources briefed said Emerson is angling for a price in the USD 4bn-USD 5bn EV range. All of the sources said this was a tough ask, with one noting that no buyers, to his knowledge, are considering a valuation near this range.
Emerson likely wants a high price to take into account the capital it has invested in network power through acquisitions, one of the sources said.
A USD 5bn valuation would have been reasonable when network power had double-digit EBITDA margins and stable-to-slight growth, another one of the sources said.
Network power generated approximately USD 450m-USD 475m of EBITDA for 2015, according to one of the sources briefed. “I could see [a multiple] as low as 5x or as high as 8x,” said the same source, adding that the higher end of the range would be likelier if the business demonstrated revenue and margin stability. Another source said the EBITDA figure is moving around.
Since 2011, when network power reported USD 6.8bn in sales following major purchases, the business has seen its revenues consistently decline. This is attributed to a combination of factors including divestitures, weakness in telecommunications and information technology end markets and geographic challenges, particularly tied to Europe.
For FY15, the unit reported USD 4.4bn in sales and a 5.2% margin, down from USD 6.1bn in revenue and a 9% margin for FY13.
In 2013, Emerson sold a 51% stake in its embedded computing and power business to Platinum Equity in return for approximately USD 300m in cash. Emerson retained a 49%, non-controlling interest in the business, which was previously part of network power. It has since been renamed Artesyn Embedded Technologies.
The subsequent year, Emerson sold Connectivity Solutions, also a part of Network Power, to Bel-Fuse (NASDAQ:BELF.B) for USD 98m.
Farr said on the conference call last week that Emerson had succeeded in stabilizing the earnings in network power. “I think if you look at the underlying order pace of our network power business, it's actually noses up.”
Part of the conundrum for potential network power buyers is trying to quantify how much more decline is left in the asset. “What multiple do you apply to a declining business?” questioned one of the sources.
Green shoots would include signs that network power is able to thwart competition from Asia and has leverage on product pricing, said the same source.
In addition to valuation, obtaining financing for a potential buyout of network power in the current market will likely prove difficult given the business may still erode and arguably lacks stability.
Beyond valuation complexities, any potential buyer would need to take on significant restructuring tasks, said one of the sources. Getting comfortable with this point may be harder for a buyer than the ultimate number ascribed to the business, he said.
Logical strategic suitors are few and include Eaton (NYSE:ETN), Schneider Electric (EPA:SU) and Taiwanese Delta Electronics (TPE:2308), said one of the sources. He downplayed the likelihood that ABB (NYSE:ABB) or General Electric (NYSE:GE) would pursue the business.
In 2010, Emerson completed the acquisition of UK-based uninterruptible power supply business, Chloride Group, for approximately USD 1.5bn. Emerson went toe-to-toe with ABB for the asset, which was ultimately added to network power. The deal came on the heels of Emerson purchasing Avocent in 2009 for USD 1.2bn.
Since the acquisition, Chloride Group hit macroeconomic winds affecting its profitability. In 2014, Emerson took a goodwill impairment charge of USD 508m.
Emerson declined to comment. The company is hosting an investor conference today, 10 February, and tomorrow, 11 February.