REGAL REXNORD & ALTRA INDUSTRIAL MOTION

By: Dhroov Kshatriya

On October 27th, 2022 Regal Rexnord (NYSE: RRX) a leading manufacturer of automation solutions and industrial powertrain solutions announced a press release about their agreement to acquire Altra Industrial Motion (NASDAQ: AIMC), a leader in power transmission products Regal Rexnord acquired 100% of Altra’s shares (79,838,709) as a part of their “all-cash” deal at $62.00 per share, which was about $2.28 higher (per share) than Altra’s share price ($59.72) on the day of the announcement, which implied a 3.8% control premium. AIMC’s share price 1 day before the announcement was $4025, and it jumped to $60.10 one day after the agreement, a solid 49% jump. The total value of the acquisition was $495 billion The deal was closed on March 27th, 2023

The advising side of the deal included Goldman Sachs as financial advisors to Altra Industrial with Cravath, Swaine & Moore and Sullivan and Cromwell as legal advisors. Regal Rexnord had a combination of J.P. Morgan and Incentrum as financial advisors and Simpson Thacher & Bartlett and Sidley Austin as legal advisors. The deal brings the brands Kollmorgen, Portescap, Twiflex, Thomson, Bauer Gear Motor, Stieber, Stromag, Jaure, Kop-Flex, Centa, Falk, and Rexnord together The primary goal of this deal is to transform Rexnord’s existing automation portfolio namely ModSort and Automation Solutions (formerly Arrowhead) into “a meaningful, global automation solutions provider.”

Regal Rexnord expects this merger to improve free cash flow through a higher percentage of market share. Through synergies, based on growth and margin outlook, there is an expectation of $160 million in annualized run rate cost synergies with expectations of $83 billion in revenue by 2025 These synergies are expected to be driven by procurement, distribution efficiencies, footprint rationalization, and SG&A savings. This also puts the gross margin expectation at 40% by 2025 These projections are based on the high growth prospects in the automation industry as this acquisition will enable Rexnord’s ModSort and Automation Solutions and Altra's Automation & Specialty platform to transform their entire automation portfolio. These expectations are also driven by the unique position that Rexnord gained through this deal: it significantly increases its industrial powertrain portfolio as complimentary products like brakes, gears, and clutches will be added in while also increasing its participation in the number of end markets, which has the potential to reach 70% of the sales in the automation business

Altra Industrial Motion was valued at $4.74 billion but acquired at $4.95 billion. However, I don’t believe that Rexnord overpaid for it. Beyond the astronomical returns expected from the synergies, AIMC is in a strong position as a company Their diluted EPS rose from 0.42 in 2021 to 1.94 in 2021. Further, the financial health of the company can be verified with its strong current (222) and quick ratios (1.23), and lower debt to equity ratio (0.53). Beyond that, AIMC also noticed a 358% net income growth in 2022. This is possibly due to the supply chain changes recently and amplified by the growth potential in this industry. Thus, this acquisition has the ability to prove highly profitable for RRX. Regal Rexnord has seen consistent growth in its EPS, reaching an all-time high in 2022 at 7.33. Post this deal, EPS is set to grow but only slightly keeping in mind the changes in the supply chain. Thus, moving forward, if Regal Rexnord is able to efficiently utilize the synergies, they will be in a strong position to meet the $8 billion revenue goal and position themselves as a leader in the industry