Milwaukee-based Rexnord Corp. plans to combine its process and motion control business with Regal Beloit in a move that will leave the remaining company entirely focused on its water management business.
The deal, which values Rexnord’s PMC business at $3.69 billion, calls for Rexnord to spin off the business and then combine it with Regal Beloit in exchange for $3.32 billion in Regal stock and the assumption of $370 million in debt. The transaction would leave Rexnord shareholders with around 38.6% ownership in the combined company and current Regal shareholders with 61.4% ownership.
Pending regulatory approvals, the deal is expected to close in the fourth quarter of this year.
Regal Beloit will maintain its Beloit headquarters while the combination of Rexnord’s PMC business and Regal’s power transmission solutions business will be headquartered in Milwaukee and operate under the Rexnord name.
Todd Adams, the chairman and CEO of the current Rexnord Corp., will stay with the company to lead the remaining water management business.
“We feel like we’re unlocking and creating two terrific businesses that can be clearly understood by investors,” Adams said. “We can each focus on the consolidation within our respective markets and leverage the competitive advantage that comes with technology, product development and commercial excellence.”
Louis Pinkham, chief executive officer of Regal Beloit, said the deal would bring together two “highly complimentary businesses.”
Rexnord’s PMC business, which makes equipment used in a number of markets including food and beverage, aerospace, mining, power generation, industrial and automation applications, accounted for nearly 66% of the company’s revenue during its most recent fiscal year, which ended in March 2020. Over the last nine months, it accounted for around 61% of sales as revenue was down nearly 13% with decreased demand amid the COVID-19 pandemic.
Regal Beloit's PTS business, which it acquired from Emerson Electric Co. in 2015, sells bearings, conveyor products, couplings and gearboxes into a variety of industries. It generated $711 million in revenue in the last year compared to $1.23 billion for Rexnord's PMC business.
“Together, we will create a truly world class power transmission provider strategically positioned for the digital age,” he said.
Regal Beloit executives expect to generate around $120 million in annual cost synergies from the deal within three years, primarily in the areas of procurement, footprint consolidations and selling, general and administrative expenses.
Around $70 million in savings would be realized in the first year of the deal, primarily in procurement and SG&A. Pinkham said there is a lot of strength on both sides of the deal so the SG&A cost savings would likely be evenly split.
On procurement, he said Regal Beloit performs better on sourcing from the best value country while Rexnord does better on commodity management.
Pinkham acknowledged Regal Beloit has already outlined a number of sites that would be consolidated in time as the company pursues footprint-related savings. He did not specify which facilities that would include, but said Regal Beloit would look to establish centers of excellence for products like gearing, couplings and bearings to make sure it realizes its projected savings.
Regal Beloit does plan to maintain and invest in its Florence, Kentucky facility, the current headquarters for its PTS business, Pinkham said.
Rexnord’s PMC business has 43 manufacturing, warehouse and repair facilities globally, including 24 in North America. Regal Beloit’s PTS business has 20 facilities in total, including 11 in the U.S. and two in Mexico.
Asked about his confidence in delivering more than half of the projected synergies in the first year after the deal, Pinkham reiterated the complimentary nature of the businesses and the amount of time until an anticipated closing.
“We’ve got seven to eight months of planning ahead and when you can plan, you can execute,” he said.
The deal itself is structured as a reverse Morris trust transaction, allowing it to be tax-free for Rexnord. Typically, such a transaction would require Rexnord shareholders to own more than 50% of Regal after the deal is complete. While the transaction appears to fall short of that threshold on its face, the two companies said they have a number overlapping shareholders, allowing it to move forward.
The exact amount of overlap will not be clear until the deal is set to close. The parties said they will seek a private letter ruling from the IRS to develop a method for identifying the overlap. Any needed adjustment would be made by issuing Regal Beloit stock to Rexnord shareholders and a dividend to existing Regal shareholders.
The dividend could range from $100 million to $500 million, executives said.
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