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Parker-Hannifin Corp. is making its biggest acquisition ever, moving to expand a portfolio of industrial filters by agreeing to acquire Clarcor Inc. for about $4.3 billion including debt.
The cash offer of $83 a share represents a premium of 18 percent to Clarcor's closing price on Wednesday, according to a statement Thursday by Cleveland-based Parker. Clarcor's market value was $3.4 billion on Wednesday.
Adding Clarcor will double Parker's filtration business and help insulate sales from the ups and downs of markets such as mining and oil and gas because most of the acquired company's products are sold for maintaining existing equipment. Downturns in those industries have caused Parker's sales to shrink for the last seven quarters.
"We know this company very well. We operate in the same space," Parker Chief Executive Officer Thomas Williams said on a conference call. Clarcor gets about 80 percent of sales from replacement products, he said, which "makes our company much more resilient and less volatile to the business cycle."
Parker climbed 3 percent to $143.03 at noon in New York. Clarcor advanced 17 percent to $82.31.
The acquisition is expected to add to Parker's earnings in the first year after discounting one-time costs related to the acquisition. Industrial companies, including General Electric Co. and Honeywell International Inc., have boosted acquisition efforts to make up for declining markets.
"This deal looks to be strategically sound, well timed, and financially attractive once fully integrated," said Buckingham Research Group analyst Joshua Pokrzywinski in an email. "I believe the potential to take advantage of Clarcor's aftermarket presence in Parker's distribution network is likely still underappreciated."
Clarcor also makes filters for heavy industrial applications as well as the automotive industry. The deal adds to Parker's fuel and oil filters, as well as products for the hydraulic and compressed air markets.
Clarcor reported $1.5 billion in sales for the fiscal year through November 2015. About 58 percent of the revenue comes from the industrial and environmental filtration unit, with the rest based on products made for autos, tractors and construction equipment. The Franklin, Tennessee-based company has about 6,000 employees worldwide.
Parker expects to realize annual cost savings of about $140 million three years after closing, in part through the consolidation of the companies' supply chains. To achieve those benefits, Parker will incur a one-time cost of $90 million.
The company said it would fund the acquisition with $1.5 billion in cash and $3 billion in new debt, a possible threat to its credit rating.
"Parker-Hannifin's net leverage may approach 2.5 times pro forma for Clarcor," Joel Levington, an analyst at Bloomberg Intelligence, said. "That level is above Moody's stated goal at its A3 rating, as well as above what S&P has articulated for expectations at its A rating."
S&P Global Ratings cut its outlook on Parker to negative from stable and said it might lower the company's credit rating "if weaker-than-expected operating conditions, unexpected integration issues, or more aggressive financial policies limit its ability to improve its elevated credit measures relative to our expectations." The acquisition "will modestly enhance" the company's business-risk profile and annual free cash flow is expected to be more than $1 billion after the acquisition, the bulk of which should be used to reduce debt, S&P said in a statement. Parker said reducing debt is a "near-term priority."
"We continue to consider Parker-Hannifin's management and governance as strong based on our view of management's consistent and clear strategic focus and operational excellence," S&P said.
Parker, which has 49,000 employees, posted sales of $11.4 billion for the fiscal year through June, an 11 percent drop from the previous year. Shares jumped 43 percent this year through Wednesday after declining in 2015 on expectations the downturn in oil and gas and mining has hit bottom.
The transaction is expected to be completed by the end of September, subject to customary conditions and approval by Clarcor's shareholders.