What happened

Shares of plumbing equipment company Zurn Water Solutions (ZWS -1.49%) closed 12% higher on Monday after announcing that it will merge with (i.e., acquire) privately held sink manufacturer Elkay Manufacturing.  

So what

Zurn said it will pay Elkay shareholders with 52.5 million shares of Zurn, worth $1.56 billion at closing, or about 14.2 times 2022 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Elkay shareholders will hand in their shares in exchange for the Zurn shares, with the result that post-merger, Zurn shareholders will control 71% of the combined company and Elkay shareholders 29%.

The merger is expected to close sometime in the third quarter of 2022.

Wall painting depicts a large yellow fish eating a smaller yellow fish.

Image source: Getty Images.

Now what

Now 14.2 times EBITDA isn't a particularly cheap price. Then again, for Zurn, it's probably more than affordable, given that it will pay for the transaction entirely in its own shares -- which are worth nearly 22 times EBITDA. Adding to the attraction for Zurn shareholders, the company believes that there are "$50 million in run-rate cost synergies" that it can extract from the merged company by cutting costs.

Commenting on the merger, Zurn CEO Todd Adams said: "This transaction is a true game-changer as we create an even stronger pure play water company by combining with the iconic brand, Elkay, [which is] viewed as the 'gold standard' in providing clean drinking water within institutional and commercial buildings."

Furthermore, Zurn sees this deal as a way to move toward its goal of "doubling the size of the business over the next couple of years while enhancing our competitive advantage within specified water solutions." 

Given the 12% move higher in Zurn's share price today, it seems investors agree with that assessment.