Making good on a promise made four months ago, Rockwell Automation today disclosed that it has reached an agreement to sell its Power Systems business to Baldor Electric Co., a maker of industrial motors, drives, and generators, in a cash and stock deal valued at $1.8 billion.
Under the terms of the deal, Baldor will pay $1.75 billion in cash and tender approximately 1.6 million shares of its common stock, valued at $50 million, for Power Systems, which includes Rockwell's Dodge power transmission and Reliance motors business units. The transaction is expected to close early in the first quarter of 2007, and is subject to regulatory approvals, the two companies said.
For Rockwell, the sale of its $1 billion Power Systems business continues a long-standing push to focus its strategy around industrial automation products and services. For Baldor, the deal extends its motors business into the high-end of the market via Reliance, and offers a way -- through Dodge -- to diversify into the power transmission business.
"It seems like a win-win to me," said Craig Resnick, an analyst at ARC Advisory Group, adding that Rockwell's Power Systems business was no longer a primary focus for the company and appears to fit well with Baldor's portfolio. "Rockwell, it seems, got a fair price and can now continue to focus on areas such as its integrated [automation] architecture and process controls."
Rockwell officials did not return calls requesting comment on the deal by press time. However, in a prepared statement, company Chairman and CEO Keith D. Nosbusch pointed to the "compelling cultural and strategic fit" between Baldor and Rockwell's Reliance and Dodge businesses. "Both organizations have similar operating philosophies and are committed to treating employees with respect, delivering high-quality products, and providing exceptional service to our customers," he said. "Power Systems will benefit significantly from ownership that is dedicated to investing on a global basis to create a leading motors and power transmission business."
In a conference call with analysts to discuss the deal, Baldor Chairman and CEO John McFarland reiterated the respect his company has for the Reliance and Dodge business units, noting that Dodge was once one of Baldor's largest customers. "This is a unique opportunity to acquire a high-quality company, with good products, good profits, and especially good people," McFarland said.
McFarland pointed to a multiplicity of business drivers that made the deal attractive to Baldor, an 86-year-old company with 2005 revenues of $721 million and 3,900 workers across 14 manufacturing plants (13 in the U.S., one in the UK). The synergies start with complementary products and customers, he noted. Baldor focuses on small to medium-size motors (15 horsepower or below), while Reliance excels at the high end of the market.
"We're big in packaging and the food-process industries that consume small motors," McFarland said, noting that the larger motors that Reliance makes are heavy-duty products used in mining, oil and gas, and paper production, as well as by the defense and nuclear power industries.
In addition to the $1 billion in higher-margin sales of complementary products , the Rockwell Power Business unit is expected to deliver additional manufacturing process know-how and efficiencies, as well as incremental cost savings, McFarland said.
Key to the deal is Dodge's manufacturing presence in China, McFarland pointed out, which would extend Baldor's ability to serve the entire Asian market, he said. Today, Baldor sells products manufactured in the U.S. to Asian customers through a sales office in China. "We've struggled with how get into China," McFarland acknowledged, noting that the company had avoided a "bet the company" strategy. Dodge's local presence and personnel, he said, will offer Baldor "a good platform for growth in Asia going forward."
Dodge's China facility, he added, would not be used to serve the North American market. Baldor continues to make capital investments in its domestic plants to deliver products in an efficient and cost-effective manner no matter where its customers reside, McFarland maintained. "We have a $120 million business in the export of motor products from U.S. plants to China, Korea, Taiwan, and throughout the world," he said. "This transaction helps us strengthen this strategy."
In addition, the Rockwell business units have demonstrated operational excellence in lean manufacturing, plant maintenance, and product engineering. "Those are skills we can use to make Baldor a better company," McFarland said. Baldor, he said, excels in flexible manufacturing, shorter product cycles, and lower work in progress inventory -- business attributes which will make Reliance and Dodge facilities more productive.
Moreover, the Rockwell Power business units have some excess plant capacity that Baldor hopes to take advantage of. "Certain areas within Reliance's motor business could be a solution for some of our capacity issues, where we've put off capital investments that we otherwise would have needed to make," McFarland pointed out, adding that the deal would improve the efficiency and profitability in all of the combined companies' motor plants.
Through the deal, Baldor envisions annual pre-tax cost savings of roughly $30 million achieved over the next three years from the benefits of combined purchasing, working capital management, reduced overhead, and increased productivity. The transaction, moreover, is expected to add 10 cents per share to Baldor's earnings in the first full year after the acquisition, the company noted.
In an interview, Tracy L. Long, Baldor's vice president of investor relations, said the company did not anticipate layoffs as a result of this transaction. "We have a no-layoff strategy," she said.
Baldor hopes to retain the Power Business unit's management team, but hasn't yet reached out to them. "There's many months before the deal is finalized; we hope they would want to stay," Long commented.
Long said Baldor was unsure of which companies it outbid for the Rockwell unit. "It was a very well-kept secret," she said.
ARC's Resnick said he had no inside knowledge of which companies bid for Reliance and Dodge, but was sure the auction attracted many interested parties. Competitors in the space include ABB, Emerson Electric, General Electric Regal Beloit, Siemens, Toshiba, and Weg.
The deal comes amid an uptick in M&A activity in the power transmission business. Just last week, Schneider Electric agreed to buy American Power Conversion (APC), in a cash deal valued at $6.1 billion.
Resnick said the two deals reflected different scenarios. While Rockwell's motivation to sell Power Systems was driven by a strategic decision to focus on its core industrial automation products, Schneider, on the other hand, has made numerous strategic acquisitions that are building "economies of scale and mass," Resnick said. "The APC deal shows Schneider's portfolio growth, while the Rockwell deal is more about sticking ... to the factory and process automation markets and making sure all companies [it retains] are core to those values."
In agreeing to buy the Dodge and Reliance businesses, both of which are over a century old, Baldor is taking on significant debt. The company said it has received a commitment from BNP Paribas to finance the $1.75 billion cash portion of the deal through a combination of debt and approximately $350 million of equity or equity-linked securities.
When asked by one financial analyst during the conference call whether the company plans to divest any portions of the Rockwell business units once the deal is consummated, company officials were noncommittal. "This is something we are still working on," McFarland said, noting that one business in particular -- Reliance's electric motor repairs operation -- might not mesh as well with Baldor as other portions of the company.
While expressing comfort with the price it expects to pay for the Rockwell Power business, McFarland said Baldor was working on a plan to quickly and effectively reduce the debt service the transaction would bring. "We don't have a lot of debt going into this transaction, but will have a lot coming out, and that will be a focus for us," he concluded.