Timken India's ABC Bearings acquisition a win-win for both firms

Timken India gets desired products to drive growth

Timken India, having doubled it capacities in financial year 2016-17 (FY17) to tap growth opportunities, is paying a significant premium to acquire ABC Bearings. On Wednesday, Timken entered into a definitive agreement to acquire ABC in an all-stock deal. The deal will see Timken issue five shares of the company for every eight shares held in ABC to the latter’s shareholders. Although Timken is paying a 77.43 per cent premium to ABC’s shareholders (based on Tuesday’s closing prices and swap ratio), the same looks justified, given that ABC’s portfolio fits well into Timken’s product portfolio. Also, the opportunities existing in the bearing industry are immense, and the move will help Timken fructify its long-term growth goals.
For ABC, which comparatively is a small entity (its FY17 revenues were about a fifth of Timken’s), its shareholders will now become part of a multinational group (MNC) and a strong brand. Timken India is 75 per cent owned by US-headquartered The Timken Company. The merger will result in access to better technology, higher growth opportunities and also ABC’s debt being consumed by a cash-rich MNC. Not surprisingly, ABC’s share price jumped 20 per cent to Rs 285.70 and was locked at the upper limit (no sellers) for the second straight session, while Timken’s stock gained over 15 per cent to Rs 779.80 on Wednesday.

Timken has been eyeing growth and a larger pie of the high-potential railways sector. Modernisation of railways and growing metro rail projects offer huge opportunities for bearings demand. Analysts at ICICI Securities peg the demand from new wagons alone at Rs 120 crore a year, which should rub well on Timken, a key bearings supplier to the locomotive segment.
The demand from consumer vehicles (CVs) is also growing well, and Timken will gain market share from ABC’s portfolio for commercial and off-highway vehicles. Besides, it will result in addition of spherical, cylindrical and slewing bearing manufacturing capacity. Analysts say Timken has the option of using ABC’s facilities for the CV portfolio, thereby freeing its Jamshedpur capacity for growing supplies to railways. Timken doubled its overall capacities in FY17.
 

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The acquisition of ABC, however, will lead to 10.6 per cent equity dilution, part of which will be offset by the profits of ABC; Timken’s earnings will grow by 1.4 per cent based on combined FY17 numbers. Priya Ranjan at Sytematix Shares, though, says actual earnings growth will be much more. ABC earlier had to pay higher interest costs and now as it becomes debt-free, it will have higher profit margins, Ranjan said.

The strong valuations that ABC has been able to garner from Timken boosted the Street’s sentiments as stocks of all bearing companies also gained on the bourses. The GST implementation remains a strong trigger for bearing manufacturers since unorganised players will now come under the tax ambit.