REGAL REXNORD & ALTRA INDUSTRIAL MOTION

By: Bennett Stalls

Altra Industrial

Motion

(NYSE:AIMC)

is a manufacturer of motion control, automation, and power transmission products based in Braintree, MA On October 27, 2022, Regal Rexnord Corporation (NYSE:RRX) reached an agreement to acquire 100% of AIMC’s shares at $6200 per share in cash. This constituted a significant 62.30% premium above the company’s market price of $38.20 as of October 26, 2022. The transaction was completed on March 27, 2023. The $4.95 billion transaction represents a 13.6x LTM EBITDA multiple, or 95x projected EBITDA multiple including run rate synergies RRX has retained J.P. Morgan and Incentrum Group as financial advisors and is receiving $5.5 billion in bridge financing from JP Morgan AIMC retained The Goldman Sachs Group as its financial advisor.

This transaction will provide anticipated annualized cost synergies of $160 million by year four. This will be driven by procurement and distribution efficiencies, footprint rationalization, and SG&A savings RRX projects that EBITDA margins will reach 40% by 2025 up from its previous 2025 estimate of 37% before the transaction. This transaction will enable RRX to engage in significant de-levering bringing RRX’s debt/adjusted EBITDA ratio down to 2.5x-3.0x by 2024 and target 2.0x 2.5x as the company progresses in years to come. The acquisition of AIMC will allow RRX to transition into a global automotive solutions provider by building on their current holdings, Modsmart and Automation Solutions. It will allow the company to expand its reach into industries with significant secular economic tailwinds including factory automation, medical, aerospace, and warehouse & logistics services. Additionally, AIMC will complement the RRX’s current offerings in the industrial powertrain industry by adding brake, gear, and clutch products and expanding the number of end markets the company participates in. The transaction is projected to accelerate R&D investment across business units and enhance RRX’s digital and IIOT strategies. It will rebalance RRX’s business divisions (by % of pro forma revenue) to Motion Control (48%), Climate Solutions (15%), Automation & Specialty (15%) and Industrial Systems (9%).

Directly after the acquisition was announced, RRX’s share price decreased significantly. RRX bottomed out on November 3, 2022 at $11230 per share, down 263% from its peak of $15235 on October 26,2022. RRX has experienced significant volatility since completing the transaction, with its share price ranging between $11230 and $16250 On April 3, 2023, RRX closed at $13200 and the company’s PE ratio stands at 18.12. It appears that RRX shareholders are apprehensive about this transaction and RRX’s ability to deliver on stated synergies.

I believe the success of this transaction will be dependent on the ability of the RRX management team to retain the talent of the AIMC team and successfully incorporate it into the company's current business units. Pro forma financial statements are based on the potential of gaining R&D staff on AIMC’s team as well as other skilled employees throughout the organization Additionally, the transaction is also dependent on developing soft synergies between the companies’ business units If the market is unresponsive to the potential for cross-selling in a diverse range of end markets, the company could fall short of pro-forma revenue projections. RRX and AIMC news reports do not list the deal structure. According to the 10-K, $1.3 billion in bridge financing has been used by the RRX RRX and AIMC press releases do not list the deal structure According to the company's 10-K, $13 billion in bridge financing has been used by RRX