Monday, January 11, 2010

K-tron management earns well deserved break. Sells company to a VERY unlikely suitor (KTII, HI)

Awesome deal here. If I see one ambulance-chasing securities lawyer claiming breach of fiduciary duty, I swear....

From the merger announcement:

""We are delighted that K-Tron will be joining the Hillenbrand family of companies," said Camp. "Although K-Tron's products differ from ours, we are both manufacturing companies that share similar processes and core operational values. Like our Batesville Casket business, the K-Tron operating companies are leaders in their industries and have highly effective executive management teams. K-Tron has a strong track record of delivering superior financial performance and creating significant shareholder value."

"Differ?" Ya think? I'd say the products differ SUBSTANTIALLY, seeing as Hillenbrand is in the death care industry and K-Tron is in materials handling.

K-Tron (KTII) is a New Jersey based manufacturer of materials handling equipment for various industrial companies. Their board agreed unanimously to be acquired by Hillenbrand Industries (HI) for a total consideration of about $435million or $150 per cash -->> a 32% premium to Friday's closing price.

This might be the strangest merger I've seen in a long time, as the two businesses are drastically different. Hillenbrand's main operating division is Batesville Casket, but Hillenbrand has a stated intention of buying other companies. From their website:

"As a publicly traded company, we're focused on opportunities to build a family of companies that place a high priority on excellence in manufacturing, distribution, customer service and leadership development."

They have certainly done that here, buying a fabulous asset in the purchase of K-Tron. They certainly had to pay up for it also, as the 16times earnings paid here is much more expensive than HiIllenbrand's own multiple of 10.5times earnings.

But look what they're paying for. The operational improvements at K-Tron are a large reason this small company's stock has returned 1,941% since it's IPO, or about 8times what the S&P500 has returned.

Among other things, return on equity has improved from 16% to 23% since 2004, but one detail is remarkable in this day and age. They increased return on equity while DECREASING debt-to-equity!!! While most public companies increase ROE by leveraging up with debt, these guys did it the old fashioned way, by actually increasing margins. Blasphemy! (sarcasm).



My snarky comment aside (take the money and RUN), Hillenbrand "done good" here. K-Tron's Free Cash Flow per share was almost $20 in 2008. It'll be lower this year at $14 per share, and based on the single street estimate available it will be $19 next year. Using a blended average of those numbers gets me to a Free Cash Flow Yield(FCFY%) of 12% based on the $150 takeout price. Take out the $22 per share in cash on K-Tron's balance sheet and the FCFY% goes to 14%, and even higher if you use 2010 numbers. This is also before any redundant costs (administrative, accounting etc) are cut from the combined companies, which would further boost the attractiveness of this deal.

Yes, K-Tron could actually command a slightly higher price, but this management has delivered monumental returns for shareholders, so I expect this deal to go through at the announced price, providing attractive terms for all involved.

Copyright 2010 AlphaNinja

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