Shares in distributor Diploma (DPLM) leapt 20% to £20.65 after it announced the acquisition of a leading US industrial wire producer in a deal which analysts at JPMorgan Cazenove describe as representing ‘a step change’ in the company’s growth strategy.
Diploma is paying $465 million or £357 million to acquire Windy City Wire, a distributor of premium-quality, low-voltage wire and cable. The deal values Windy City at 11.5 times earnings before interest and taxes (EBIT), a big step up from its usual multiple on acquisitions of between five and eight times EBIT.
However, Windy City has generated compound annual sales growth of 12% and EBIT margins of 20% historically and Diploma has wanted to get into the US controls market for a long time.
It is understood that the firm’s founder, who together with more than a dozen senior managers is tied in for three years, approached Diploma over the summer with a view to selling the business.
Windy City’s customer base includes building automation, audio/visual and security firms, with no single customer accounting for more than 2% of group sales meaning revenues are diversified.
In order to finance the deal, Diploma this morning raised £194 million of new equity via a share placing at £17.11 with the rest of the money coming from a debt issue at a 2.2% interest rate, which only takes the firm’s net debt to EBITDA ratio to one giving it plenty of headroom for further acquisitions.
JPMorgan raised its full year EBIT forecast by 26% and its earnings per share forecast by 11%, upgrading Diploma shares to overweight with a price target of £19.60.
Meanwhile analysts at Numis increased their earnings per share forecasts by 13% for this year and 15% for next year and lifted their price target to £19.50, calling the Windy City acquisition ‘significantly enhancing.’
