Hillenbrand's Purchase Of Milacron Should Make Somebody Happy

The management team at Hillenbrand announced the purchase of Milacron for nearly $2 billion, including net debt.\nThis transaction makes sense fundamentally, but if there\'s a winner from the two parties, it\'s Milacron.\nHillenbrand paid a slight premium for the firm\'s relative value and between cash and stock, Milacron\'s investors should be happy.\nJuly 12th has shaped up to be a big day for shareholders inHillenbrand Inc.(HI) andMilacron Holdings Corp.(MCRN) followingnewsthat Hillenbrand will be acquiring Milacron in a cash-and-stock deal valuing the latter (inclusive of net debt) at nearly $2 billion. While the market still seems to be digesting these developments, data suggests that Hillenbrand paid what looks to be a slight premium for the firm. In all, Hillenbrand’s investors should be generally pleased by this development since synergies will create additional value in the long run, and investors in Milacron should be quite pleased since, if either party got the good side of the deal, it was them.The acquisition between Hillenbrand and Milacron has not been structured in any overly-complex manner. According to the press release covering the details, the former will be acquiring the latter in a cash-and-stock deal worth, to Milacron’s investors, about $18.07, or 34% higher than where shares were the day prior to the acquisition announcement. For each share of Milacron that an investor has, they will receive cash worth $11.80, plus they will be entitled to a fixed exchange ratio that comes out to 0.1612 shares of Hillenbrand for each of their Milacron units.The beauty of this transaction from Hillenbrand’s perspective is that it locks in what the company will ultimately pay for the acquiree, while for Milacron it creates some risk that if Hillenbrand’s stock drops, the effective buyout prices of the deal may fall. Such appears to be the case already, with shares of Hillenbrand down 10.5% for the day as I type this. This change will result in the effective purchase price of Milacron falling from $18.07 per share to $17.41.In buying up Milacron, Hillenbrand is slated to receive the world’s number two premium hot runners firm globally. It will also get a taste of other significant operations, like injection molding. The objective here is to continue investing in what management has identified as a $30 billion plastics technology and processing opportunity. In theimagebelow, you can see a breakdown of revenue by business, revenue by geography, and revenue by end market. What this shows is that Milacron is a well-diversified, international operation that has demonstrated the ability to successfully scale over its lifetime.

*Taken from HillenbrandMoving forward, Hillenbrand’s management team has high expectations for the firm. The combined entity, they said, will generate around $3 billion in revenue per annum (vs. the $1.8 billion Hillenbrand generates on its own). Not only will the firm benefit from a larger footprint on the sales front, there’s the expectation that costs will decrease as well as part of this move. In particular, management expects that within three years, the firm should see annual run-rate synergies worth around $50 million per annum. This will come from a reduction in public company costs, improved operating efficiencies, and both direct and indirect spending opportunities. On the public company costs, last year Hillenbrand paid audit and tax fees of around $3.57 million, while in the same year Milacron paid $4.03 million. Combining the two could permit millions of dollars per year in savings after their first year together. Due to growth opportunities, combined with projected synergies, management expects the combined firm to go on to generate $325 million in free cash flow by 2021.

*Taken from Hillenbrand Inc.Almost any way that I look at this transaction, I see that it was mostly fair between the parties involved, with perhaps Milacron walking away slightly better from it all. To evaluate the transaction, I would first like to direct you to the image above. In it, you can see some select financial metrics related to the firms and what the companies should look like as a single entity. This look excludes the synergies proposed by management. Also, in the table below, I provided more detail provided by management, including the 2018 revenue, EBITDA, operating cash flow, and free cash flow associated with each firm and what it all looks like for the combined entity.

*Created by AuthorOne thing in particular that I would like to draw your attention to is the percent of each metric each of the two businesses will contribute to the combined company. As an example, with $1.1 billion in revenue, Milacron will contribute 37.9% of sales toward the combined firm if future years look like last year did. Each metric has its own merits to consider, but the one I would say is the most sensible to rely on is operating cash flow. Revenue pays no attention to cost structure, EBITDA pays no attention to interest expense (which is important when there are differences in net debt like the nearly $400 million difference between Hillenbrand and Milacron), and free cash flow, while pure in a sense, punishes a company for investing in its future if it does so by allocating more than maintenance capex in any given year. Operating cash flow doesn’t have any of these shortfalls, with the only one that it does have being that it ignores ongoing capex needed to keep operations as they are.At first glance, when you consider that Milacron’s investors are walking away with only 16% of the pie, it may look like they are getting fleeced in this transaction. After all, they contributed 33.4% of the combined entity’s operating cash flow, but are only getting less than half of that in terms of ownership. That said, this analysis ignores the $442 million cash payout they are set to receive in addition to their ownership. To see what this would translate into, I assume the deal was structured as all-stock instead of cash-and-stock. What I found is that under that scenario, shareholders would walk away with around 35.4% of the combined company, which is more or less in line with its contribution of revenue, operating cash flow, and almost free cash flow toward the combine entity.Not only does the deal look approximately even, or perhaps even slightly in favor of Milacron, there’s also the fact that Hillenbrand is paying a multiple that implies a tiny premium over its own share price for the firm. In the table below, you can see the EV / EBITDA, the price / operating cash flow, and the price / free cash flow implied for the value of Hillenbrand and for Milacron, both at the price implied by the announcement of acquisition of Milacron. In each case, it appears as though the multiple paid by Hillenbrand might be only slightly higher than what itself is going for.

*Created by AuthorBased on the data provided, it seems to me that Hillenbrand is making a sensible investment decision here. Even without synergies, the company looks to be paying only a modest premium for Milacron, and if there is a real winner here, it looks to be Milacron’s current investors.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.