By late October of last year, three bidders interested in Rexnord’s process and motion control business had emerged. Their offers valued the business anywhere from almost $2.4 billion to a $3 billion offer from Beloit-based Regal Beloit.
The PMC business makes gears, couplings, bearings and other mechanical parts for a variety of industries. It generated nearly $1.36 billion in sales in fiscal 2020, accounting for around 66% of Rexnord’s net sales for the year.
At an Oct. 22 meeting, Rexnord’s board of directors received an update from its advisors on the process, which had kicked off three months earlier during a regular review of the company’s strategic options.
By the end of the meeting, the board made a decision. The existing offers did not provide enough value to justify the continued efforts and the risks of the discussions leaking or distracting from the execution of Rexnord’s business plans, according to securities filings.
The board directed its advisors to end discussions with the bidders and with financial sponsors that had expressed interest in other parts or all of Rexnord. The management team was told to focus on its operations and execute its strategic plans.
But the board also told management to be open to a potential tax-advantageous sale of individual business units if the opportunity arose.
Rexnord had been exploring the possibility of a reverse Morris trust transaction, which would allow the deal to be tax-free for Rexnord. The company’s shareholders would need to end up owning more than 50% of the acquiring company to move forward, but having overlapping shareholders can make it easier to meet that threshold.
Overlapping shareholders and the tax status of the deal continued to play a role in the deal as negotiations continued.
Todd Adams, chief executive officer of Rexnord, told Louis Pinkham, his counterpart at Regal Beloit, about the decision to focus on Rexnord’s own operations on Oct. 23. A little more than a week earlier, Regal had proposed a $2.7 billion deal for the PMC business and then upped it to $3 billion two days later.
Pinkham told the Regal board about the news and that there was no path forward.
A week later, on Oct. 30, Adams and Pinkham talked again. Pinkham said Regal Beloit was still interested and wanted the senior management teams of the two companies to meet. Adams said that challenges remained on the value of the PMC business and other major issues, but the two did set a Nov. 24 management team meeting.
Adams also had conversations with the other two bidders throughout November. At the end of the month, Rexnord’s board asked for offers by Dec. 9.
Regal Beloit submitted an offer that valued the PMC business at $3.3 billion. One of the other bidders came in at up to $3.264 billion and another was at $3.1 billion.
On Dec. 18, the Rexnord board opted to not pick a single bidder and kept the process competitive, communicating to each that elements of their offers needed to improve.
Two days later, each bidder had submitted new offers, led by Regal Beloit at $3.45 billion. Rexnord began to work toward an exclusivity agreement with Regal Beloit, but one of the bidders offered a $3.5 billion. The offer, however, it did not incorporate the same tax-free elements as the Regal deal and fell short in other ways.
On Dec. 23, Regal Beloit and Rexnord agreed to a 45-day exclusive negotiating period.
A little more than two weeks later, Bloomberg published an article that said Rexnord and Regal Beloit were considering a business combination. News of the potential deal pushed Regal Beloit’s stock price up nearly 5%.
The increase in Regal Beloit’s stock price soon became an issue in the negotiations with Adams telling Pinkham that the structure of the deal as it was would mean Rexnord’s shareholders would not benefit from the increase. Rexnord eventually asked Regal Beloit to submit a new proposal that addressed those concerns.
On Jan. 29, the deadline for a new proposal, Regal’s board noted that some parts of the negotiation seemed to have stalled and that Rexnord was waiting on a new offer. Regal also faced the prospect of the exclusivity period ending on Feb. 6 and the board debated whether or not Rexnord would go back to the other bidders.
Regal Beloit eventually delivered an offer to Rexnord that altered how shares of Regal stock would be issued to Rexnord shareholders based on the price of Regal’s stock. At that point, the new offer valued the PMC business at $3.681 billion, but if Regal’s stock were between $130 and $139 per share, the PMC business would have been valued at $3.798 billion.
The two sides continued to negotiate the deal, twice extending the exclusivity period. The deal they eventually signed on Feb. 15 valued the PMC business at $3.69 billion, based on the 15-day average price of Regal’s stock at $128.82 per share.
The deal was announced on Feb. 16.