November 1, 2017

Breakingviews: Emersons Tilt at Rockwell Lacks Killer Blow

by Breakingviews

Emerson Electric’s $27.6 billion offer for Rockwell Automation is as logical as it was easy to rebuff. The combination would give Emerson heft in what has fast become one of the buzzwords of the industry: process automation, namely making sensors and software that help devices chat to one another, and manufacturers do things better and faster. The trouble is that Emerson is offering too little of the wrong currency.

The bid Rockwell’s board publicly rejected on Tuesday would have left its shareholders with just over a quarter of the enlarged group, and a $13.8 billion slug of cash. But to pay a significant premium, Emerson would have had to get some serious savings out. If it could wring out something like 3 percent of Rockwell’s estimated next-year sales, worth around $1.4 billion on a present-value basis, it could justify a 6 percent premium to Monday’s closing price. To justify the 15 percent premium it offered would mean ripping out costs equivalent to an aggressive 8 percent of Rockwell’s revenue.

That premium isn’t too shabby for Rockwell considering it already trades at nearly 19 times next year’s forecast EBITDA – a 70 percent premium to their 10-year average. The trouble is that Emerson’s stock, while it has risen smartly too, isn’t as attractive in relative terms. Even before the 7 percent bump on Tuesday, Rockwell’s shares had given investors a total return of nearly 25 percent a year for the past five years, more than twice what Emerson’s have.

An offer wholly in cash would be a different matter. But it would require Emerson raise around $27 billion in debt, leaving the combined group’s balance sheet overburdened with debt of around five times EBITDA.

So Rockwell, as attractive a takeover target as it may be, is off the hook for now without having to put up much of a defence. That spares its top people some soul searching. Chairman Keith Nosbusch has been with the company since 1974, while Chief Executive Blake Moret has clocked over 30 years of service. That makes it easy to believe them when they say they want what’s best for the company. Were a cash bid to come their way, though, the pressure would be on them to prove that independence really is worth fighting for.

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