The short answer to the headline is Chromalox, a US provider of electrical products, systems and solutions for industrial process heating and temperature management. It is paying $415m, or £319m.
Digging a little deeper into the detail reveals a whole lot more.
Spirax-Sarco (SPX) is a FTSE 250 engineering group. It supplies valves, pumps and control systems for industrial steam heating systems, used in brewing beer, for example. Chromalox provides similar heat trace and management products but using electricity rather than steam. The business sells primarily through its sales engineers (circa 70%), similar to Spirax, and 78% of its revenues come from North America.
Analysts reckon the acquisition will at a stroke expand Spirax’s target addressable market (TAM) by a good 30%, or ‘by £2.1bn to £7.9bn,’ according to UBS’s calculations.
Margin boost
Spirax believes it can bring some pricing and manufacturing disciplines to Chromalox, and that will bolster operating margins. Spirax's own steam business runs on about 23% operating margins, pre central costs, Chromalox on equivalent 18%. That’ll probably take two or three years, however.
Interestingly, analysts see share price upside beyond today’s 6% rise to £56.30.
Spirax shares ‘tend to trade on a forward price to earnings (PE) of 25-times,’ says David Larkam, analyst at Numis Securities. ‘This would suggest circa £60.00 target on a 12 month basis’ he reckons.
But it’s also worth remembering that Spirax has been pretty busy on the merger and acquisition front lately, nailing three deals in the past eight months. That means Spirax’s balance sheet will carry decent leverage in the short-term, with net debt of roughly £380m by 31 December 2017 year end likely to stand at around 1.5-times the £249m of earnings before interest, tax, depreciation and amortisation (EBITDA) forecast by Numis.
