Enodis is a staple in leading burger chains like McDonald's (NYSE:MCD) and Burger King. The pairing that Middleby was proposing makes sense. Both companies compete in areas like convection and conveyor ovens, but they also fill each other's gaps nicely. Middleby has a wide range of heating appliances and Enodis has a stronghold in cooling appliances like industrial icemakers and the refrigerated display cases found at places like Burger King.
There would also be opportunities to grow geographically. Both companies are generating the bulk of their sales in North America, but their paths differ elsewhere. Middleby's strong presence in Asia and Enodis' influence in Europe would serve each company well as the two approach existing customers to market new lines.
This all reads well on paper, but it's strictly hypothetical as long as Enodis is shaking its head. During this morning's conference call, Middleby pointed to its dramatic improvement in operating margins in recent years, and the heady 70% compounded annual growth rate of its shares over the past five. That's nice, Middleby, but it will fall on deaf ears, because you're offering an all-cash deal where Enodis shareholders won't be able to benefit from the eventual synergy. The likely consolidation of manufacturing facilities isn't going to win over Enodis employees, either.
Enodis is also being stubborn. It claims that Middleby's bid "significantly undervalued the company and its prospects," but one has to wonder why shares of Enodis were trading significantly lower than Middleby's offer last week. Working in Enodis' favor, of course, is that London's Sunday Times is speculating that United Technologies (NYSE:UTX) may drum up an offer for Enodis.
Middleby wants Enodis as a way to get back into the cold market (it bowed out when it couldn't command the same kind of brand recognition that Enodis has achieved). There are also opportunities in some of the underutilized brands in the Enodis portfolio, like Merrychef, a pioneer in the technology that TurboChef (NASDAQ:OVEN) ultimately capitalized on when it won over Subway as a key client.
This won't end here. Middleby will have to do a little soul searching and number crunching to see how much more than its $1.5 billion offer is feasible. It would also be wise to explore more affordable ways to get back into the cold market.
Middleby has worked out so far for Hidden Gems newsletter subscribers. The stock has soared 387% higher since it was recommended less than three years ago. A substantial deal like this one, if both companies do eventually come to terms, is something that investors should not take lightly. A hot stock trying to make a splash in the cold market has a funny way of changing the economic climate.
Longtime Fool contributor Rick Munarriz wouldn't mind having a commercial oven in his kitchen. He can get pretty hungry. He does not own shares in any of the companies.The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
