Why Regal Rexnord (RRX) Is Buying Altra Industrial Motion (AIMC) For $4.95 Billion

By Amit Chowdhry ● Oct 27, 2022
  • Regal Rexnord Corporation (NYSE: RRX) announced it is buying Altra Industrial Motion Corp. (AIMC) for $4.95 billion. These are the details.

Regal Rexnord announced that it has reached a definitive agreement with Altra Industrial Motion Corp. (AIMC) providing for Regal Rexnord to acquire 100% of Altra shares in an all-cash transaction for $62 per share. The deal values Altra at $4.95 billion, representing 13.6x LTM Adjusted EBITDA, or 9.5x after factoring in estimated run-rate cost synergies. The transaction is expected to close in the first half of 2023.

With the addition of Altra, Regal Rexnord expects 2022 pro forma revenue of about $7.2 billion, Adjusted EBITDA of about $1.5 billion, and an Adjusted EBITDA margin of about 21%. Based on the growth and margin outlook for the combined business, and after including $160 million in annualized run rate cost synergies, Regal Rexnord targets 2025 pro forma revenue of about $8.3 billion, 2025 Adjusted EBITDA of about $2.1 billion, and an Adjusted EBITDA margin >25%.

Altra is a global designer and manufacturer of a wide range of highly engineered motion control, automation, and power transmission solutions. And the deal expands Regal Rexnord’s portfolio, customer reach, and product diversity while enabling the creation of shareholder value through enhanced growth and substantial cost synergies.

Key Strategic & Financial Benefits

1.) Creates a substantial automation and industrial power transmission business by significantly expanding Regal Rexnord’s automation portfolio and capabilities, and enhancing its power transmission offering, particularly in industrial brakes, clutches and gear motor sub-systems. And the combined company’s enhanced power transmission portfolio creates an even more compelling partner for distributors and better positions Regal Rexnord to offer industrial powertrain solutions in a broader set of end markets. Plus the transaction represents an attractive value proposition for both customers and end users through improved service capability breadth, technology content, and domain expertise.

2.) Raises exposure to secular growth end markets. And the pro forma automation business, with expected sales of roughly $1.1 billion in 2022, is anticipated to have over 70% of its sales generated in end markets with secular growth characteristics, including factory automation, medical, alternative energy, aerospace, and warehouse & logistics.

3.) Accelerates digital strategy and better positioning Regal Rexnord for Industry 4.0, which will be critical to future new product development efforts.

4.) Expected to generate sizable cost synergies of $160 million on a full-year run rate basis. Expected synergies to be driven by procurement, distribution efficiencies, footprint rationalization, and SG&A savings. And actions to realize the synergies are expected to be completed by year four. Leveraging Regal Rexnord’s competencies in 80/20 and lean, and building on its successful integration of Rexnord PMC, the acquisition presents an opportunity to further optimize the combined company’s global operating model, which in turn can support greater investment in the business to drive profitable growth. Regal Rexnord also anticipates significant cross-marketing synergies, which it will quantify at an appropriate time after the transaction closes.

5.) Path to 40% enterprise gross margins. Robust expected cost synergies plus the growth expectations for the combined business support a path to 40% gross margins in 2025 – up from Regal Rexnord’s prior expectation of reaching a 37% gross margin by 2025. And Pro Forma Adjusted EBITDA margins are expected to rise by approximately 500 basis points by 2025.

6.) Provides significant immediate and long-term value creation and financial benefits. The deal is expected to provide an attractive, double-digit ROIC by year 5, and is expected to be accretive to adjusted earnings per share in the first year after closing, with double-digit accretion anticipated thereafter as synergies accrue and de-levering is planned to occur.

7.) Strong cash flows and a rapid path to de-levering. And building on the legacy of Regal Rexnord and Altra, the pro forma enterprise is expected to generate substantial free cash flow, which will support a strong pace of debt reduction. And Regal Rexnord expects to lower its net debt/adjusted EBITDA ratio to between 2.5x and 3.0x in 2024, and below 2.5x thereafter. Pro forma free cash flow conversion rates are expected to approximate 100%.

8.) Unites aligned cultures with a deep commitment to 80/20 and Lean principles. And the businesses share cultures focused on serving customers and driving operating efficiencies.

9.) Talent infusion into Regal Rexnord as a result of the combination is expected to support and help propel the many growth and margin enhancement initiatives currently underway, in particular around 80/20, Lean, digital/e-commerce, and product development.

KEY QUOTES:

“This acquisition opens up many new avenues for profitable growth. In particular, Altra’s Automation & Specialty platform transforms our existing automation portfolio – namely ModSort and Automation Solutions (formerly Arrowhead) – into a meaningful, global automation solutions provider. The automation business has highly attractive growth prospects and margins, serving many markets that have anticipated secular growth tailwinds, including factory automation, medical, aerospace, and warehouse & logistics.”

“The transaction also significantly enhances our power transmission portfolio, in particular our industrial powertrain offering, by adding complementary products in brakes, gears, and clutches, while extending the number of end markets in which we actively participate.”

“We believe this combination presents attractive opportunities for all our stakeholders – our customers, our associates, and our shareholders. We see tremendous upside from bringing Regal Rexnord’s 80/20 skillset, partnered with both companies’ continuous improvement mindset, and a disciplined plan-do-check-act (PDCA) management approach — producing a broader offering and higher service levels for our customers, growth opportunities for our associates, and compelling expected financial returns for our shareholders, including enhanced growth, cost synergy-driven margin expansion, attractive ROIC, and earnings accretion.”

“Among the many benefits Altra brings, a particularly notable one is the infusion of additional talent into our combined business, to help support and guide our many growth and free cash flow enhancement initiatives. Importantly, Regal Rexnord and Altra are a terrific cultural fit, with a shared commitment to integrity, customer success, and continuous improvement. We are confident that these shared values and complementary businesses will help facilitate a seamless transition and support our continued success.”

— Regal Rexnord CEO Louis Pinkham

“I, and the entire Board, are extremely excited to see Regal Rexnord take this next step in what has been a compelling transformation journey. We are confident, given a proven operational and M&A integration track record, the organization is well positioned to pursue what we believe will be a highly value-enhancing transaction – for Regal Rexnord’s associates, its customers, and its shareholders.”

— Rakesh Sachdev, Non-Executive Chairman