MCRN shareholders will receive $11.80 in cash and a fixed exchange ratio of 0.1612 shares of HI common stock for each share of MCRN. The implied total consideration of $18.07/share, based on yesterday's closing price of HI, represented a 34% premium to MCRN shares.
However, since shares of HI are trading lower by 10% this morning, MCRN is currently trading well below the implied consideration as the stock component of the deal weighs.
From a strategic standpoint, the acquisition looks like a good fit since the companies are involved in differing aspects of product preparation and production.
HI manufactures industrial equipment such as compounding and extrusion machines, conveying equipment, and feeders and blenders. The equipment is used across a variety of industries including food production, agri-business, plastics, and chemicals.
MCRN manufactures injection molding and hot runner systems that are used in plastic processing. Customers across a wide spectrum of industries, including OEMs, automotive, electronics, and packaging, use this equipment to produce parts and products.
The acquisition diversifies HI's product line and customer base, but HI also sees the transaction offering opportunities to generate revenue synergies by cross-selling extruder and material handling equipment.
Furthermore, through operating efficiencies and the reduction of public company costs, HI believes the acquisition will produce cost savings of about $50 mln within three years.
The $2 bln price tag also looks reasonable, equating to 1.7x MCRN's projected FY20 revenue and 9.3x EBITDA. MCRN has been struggling recently, though, as its revenue fell by 14% in Q1 following a 4% drop in Q4. Therefore, MCRN wasn't in the strongest negotiating position.
In addition to MCRN's recent soft results, there are a couple other reasons why HI investors may be apprehensive about this deal.
First, the equity portion of the deal is dilutive. Investors probably would have preferred a straight cash transaction. Also, HI is taking on an additional $686 mln in long-term debt that sits on MCRN's balance sheet. That will be in addition to the debt HI is taking out to finance the cash portion of the deal.
Key Takeaways: The addition of MCRN looks like a rational fit, and HI paid a reasonable price for the company in our view. But the structure of the deal appears the be the hang-up, as the issuance of equity and the addition of a substantial amount of new debt creates angst.