Industrial conglomerate Fortive Corp. (FTV 0.22%) was carved out of former parent Danaher Corp. (DHR 0.07%) in 2016, in part to give the spinoff more flexibility to do deals and reshuffle its portfolio. On March 7, Fortive put that flexibility to use, announcing a complex $3 billion transaction that would combine parts of its business with Altra Industrial Motion Corp. (AIMC).
Danaher, throughout its history, has been an ever-changing collection of assets that generated strong returns for its investors. Here's a look at what Fortive is up to, as we try to determine whether owning the offspring will be as lucrative for investors as owning the former parent has been.
Image source: Danaher.
What happened?
Terms of the deal call for Fortive to combine its Automation & Speciality (A&S) assets with Altra via a Reverse Morris Trust, a structure that allows companies to complete a divestiture without some adverse tax implications. Fortive is expected to receive cash and debt relief totaling $1.4 billion from the transaction, as well as Altra shares worth about $1.6 billion.
Those Altra shares will end up with Fortive shareholders, giving them in the aggregate 54% control of the bulked-up Altra. Depending on exactly how Fortive decides to proceed, its shareholders could either get a chance to swap some or all of their Fortive shares for Altra shares, or simply receive Altra shares pro rata in proportion to their shareholdings in Fortive.
Post-deal Altra would nearly double in size, to $1.8 billion in annual sales; it's expected to generate annual EBITDA (earnings before interest, taxes, depreciation, and amortization) of about $350 million, up more than 150% from its 2017 result of $130 million. Altra, a maker of power-transmission and motion-control products, said the deal for Fortive A&S would broaden its available technologies and addressable markets, gaining increased exposure to industries including the medical, robotics, factory automation, aerospace, and food and beverage sectors.
"The addition of the A&S platform bolsters our ability to compete effectively on a larger and more global scale in the broader automation space, to further our continuous improvement journey, and to optimize our portfolio in an expanded acquisition universe," said company chairman and CEO Carl Christenson in a statement. "This combination creates a focused global leader in the power transmission and motion control industry and is an important next step in our strategy to accelerate growth and build value."
Dealmaking DNA
Given Fortive's history, it was only natural the company would be an active dealmaker. Former parent Danaher was formed more than 30 years ago by M&A (mergers and acquisitions) specialists Steven and Mitchell Rales, and the company used dozens upon dozens of increasingly larger acquisitions to build a $65 billion conglomerate with operations in life sciences, diagnostics, environmental services, and industrial tools.
Fortive was essentially the operations at Danaher outside the life sciences, and the assets it is selling to Altra were among the company's flagship properties. While the businesses were generating about 24% adjusted EBITDA margins, they were also cyclical in nature and capital-intensive to maintain. Post-deal, the company would still generate nearly $6 billion in annual sales from a collection of instrumentation and industrial technology businesses, though Fortive said to expect net earnings to be diluted by 8% to 9% in a split.
Perhaps Fortive could have tried just to buy Altra and create a leading power-transmission and motion-control company in-house, but management has said it's more interested in shifting toward assets that have a larger recurring-revenue element via software and services. Following this deal, the company will have at least $5 billion in M&A capacity for 2018, and it seems likely to do a deal sooner rather than later.
What now?
It is going to be messy for a while for both Fortive and Altra, as the two companies work out the particulars of the Reverse Morris Trust -- along with the usual integration distractions that come with a large deal -- and Fortive goes hunting for targets of its own. But over time, both companies are good bets to be outperformers.
Past performance is not indicative of future results, of course, but Fortive feels like a second chance to get in on Danaher at its early stages. Fortive has adopted the M&A criteria and integration playbook that Danaher used to grow its share price by nearly 750% over the last 15 years. The split happened in part because Danaher officials believed there were not enough industrial opportunities to keep moving the needle at a large conglomerate, but the smaller Fortive should have no problem finding bolt-ons to add to its existing operations.
Altra, meanwhile, should have a significant role as a supplier to red-hot trends including robotics, factory and warehouse automation, and robotic surgery. That is an area where larger companies including Honeywell, Emerson Electric, and Rockwell Automation have been eager to expand, setting up a number of different ways shareholders could win by holding Altra.
If you're a patient investor able to stomach some potential near-term turbulence as the transformation continues, you're likely to do well buying into Fortive ahead of the split, and possibly gaining exposure to both it and Altra for years to come.
