A 25%-plus slump in the stock price of industrial equipment maker Colfax has complicated plans to raise US$500m-$700m in equity or equity-linked securities to help fund the pending US$3.15bn cash acquisition of orthopedic device maker DJO Global. But management insists its plans have not changed.
Colfax earlier this week completed a US$3bn bank financing to cover most of the cost of the DJO deal, a move that may give it some flexibility to delay the equity offering or sell fewer shares if the current tough market backdrop persists into the new year.
The company’s share price has sunk from nearly US$28.00 to about US$20.00 in the month since the DJO announcement on November 19. That means the company would otherwise need to sell more shares than expected and potentially harm the economics of the acquisition.
While the bank financing accounts for the largest portion of the cost, the overall funding plan announced alongside the acquisition has not changed, Colfax CFO Christopher Hix told analysts on an update call early Wednesday.
Hix was asked by one analyst if Colfax’s planned equity/equity-linked financing was off the table given the bank financing appeared larger than some anticipated.
“The bank financing (is), certainly, the largest component,” Hix said.
“We’ve talked about US$500m-$700m of equity or equity-linked type securities… We’ll continue to monitor and assess the markets looking for the right sort of space and time to execute the remainder of the financing, but our overall plans have not changed.”
POOR RECEPTION
Colfax’s DJO purchase is one of several recent M&A deals that have been poorly received by investors as stocks have tumbled into correction territory in the current quarter.
Others include Tivity Health’s US$1.3bn purchase of Nutrisystem announced earlier this month and CommScope’s US$7.4bn purchase of Arris International last month.
In each case, the acquirer’s stock price has fallen by 25% or more.
“The leverage levels in all of these (companies post-acquisition) are going to be four times pro-forma, even with some equity financing (or equity component),” one M&A banker said last week.
“If your share price is down 20% it is going to be even more punishing from a financing perspective.”
Though it failed to reverse recent declines, Colfax also affirmed early Wednesday it expected to grow 2018 adjusted earnings more than 25% to US$2.20-$2.30 a share.
Colfax expects the DJO acquisition, from private equity firm Blackstone, to add to its earnings per share in the full year after the close of the deal, which is expected in the first quarter of next year.
On Monday, Colfax entered a new US$3bn credit agreement with 23 banks, led by JP Morgan and Credit Suisse, to fund the DJO deal.
The funding consists of a US$1.3bn revolving credit facility, a US$1.2bn Term A-1 loan which matures in five years, and a US$500m Term A-2 loan which matures in two years.
Colfax has also said it is considering the sale of its air and gas handling operation.
In a note published Thursday, Oppenheimer analyst Bryan Blair said though Colfax’s investors saw DJO as a transformative acquisition, near-term risks such as elevated late-cycle leverage and financing complexity had thus far outweighed structural portfolio benefits of the combination.
These benefits included “less cyclicality, higher margins, more predictable cash flow and enhanced runway for bolt-on M&A,” Blair wrote.