Seeking to preserve legacy and culture, Elkay was heading toward IPO before Zurn offer emerged

The owners of Elkay Manufacturing were preparing to take the Downers Grove, Illinois-based company public after determining there were no appropriate buyers for the business before Milwaukee-based Zurn Water Solutions made an offer to buy the company. The maker of water bottle fillers and other plumbing products went as far as holding a kick-off meeting for the IPO at the Chicago offices of JP Morgan Chase in mid-June. A week later, Zurn chief executive officer Todd Adams met with Tim Jahnke, chairman and CEO of Elkay, and expressed interest in a potential business combination the two had discussed earlier in the year. By late September, Elkay’s board and executives had decided to delay their IPO efforts in favor of pursuing the deal with Zurn, according to securities filings. The two companies ultimately announced a $1.56 billion deal in February that will give Elkay’s shareholders around 29% ownership in a combined company along with two seats on Zurn’s board. Jahnke and Errol Halperin, an attorney and Elkay board member since 1980, are designated as the two new board members in securities filings. The deal is the second major transaction for Zurn since the start of 2021. In February 2021, Zurn, then known as Rexnord, announced plans to spin-off its process and motion control business and then merge it with Regal Beloit. Securities filings for the Elkay deal show that as early as April 2021, Adams and Jahnke had preliminary conversations about combining their businesses. Elkay, which has been family-owned for more than 100 years, had been evaluating options for its future corporate structure since October 2020. Potential options included remaining family-owned, finding a minority investor, going public or selling to a strategic or financial buyer. Those options were being evaluated against a number of goals, including liquidity, tax consequences, value to stockholders, legacy and culture. At a March 17, 2021 meeting, the company’s board decided none of the sales options would meet the legacy and culture criteria. As a result, the board planned to pursue an IPO of 20-25% of Elkay’s common equity. After his June meeting with Adams, Jahnke told the Elkay board he’d been contacted by Zurn and three other companies had expressed interest in buying Elkay since the decision to move forward with the IPO. Initially, Ronald Katz, the company’s largest shareholder and the son and grandson of its founders, indicated he would be in favor of a sale. However, after discussion, Katz and other significant shareholders agreed they would be open to a sale if it could address concerns about the company’s legacy and culture moving forward. Part of addressing those concerns includes naming the company Zurn Elkay Water Solutions Corp. after the deal closes. In a September meeting, Elkay’s banker advised the board that “while an IPO would likely be well-received by the market, the merger with Zurn provided a unique opportunity to merge with a water-only business and provided a higher initial value and greater liquidity options than the IPO,” according to the securities filing. While the two sides held additional talks and presentations in July and August, Zurn didn’t provide its first proposed term sheet until November, after the deal with Regal Beloit was complete. Zurn’s initial offer called for Elkay’s shareholders to receive 48.2 million shares of Zurn stock, giving them ownership of 27% of the company. Elkay’s counter proposal called for a 52.5 million share consideration, giving Elkay’s shareholders 29% ownership in Zurn. By Dec. 10, the two sides had agreed to those terms in principle along with adding two Elkay board seats and giving Katz board observer rights. The next two months were spent negotiating details of the deal, including lockup and support agreements, due diligence and site visits. The deal was announced Feb. 14.