Ceco Environmental: Akquisition of PMFG
CINCINNATI and DALLAS - CECO Environmental Corp. ("CECO") (CECE) and PMFG, Inc. ("PMFG") (PMFG), jointly announced that the companies have entered into a definitive merger agreement in which CECO will acquire PMFG. CECO is a leading global environmental, energy and fluid handling technology company. PMFG is a global provider of engineered equipment for the abatement of air pollution, the separation and filtration of contaminants from gases and liquids, and industrial noise control equipment. The transaction is expected to close in the third quarter of 2015. CECO expects the transaction to be accretive in 2016.
Pursuant to the merger agreement, CECO will acquire all of the outstanding shares of PMFG common stock for cash and stock valued at $6.85 per share (approximately $150 million equity value or $130 million enterprise value), representing a 48% premium to PMFG's closing share price on May 1, 2015. PMFG's shareholders may elect to exchange each share of PMFG common stock for either $6.85 in cash or shares of CECO common stock having an equivalent value based on the volume weighted average trading price of CECO common stock for the 15-trading day period ending on the trading day immediately preceding the closing of the merger, subject to a collar. Elections are subject to proration such that PMFG's outstanding shares will be exchanged for approximately 55% of CECO common stock and 45% cash.
The completion of the merger is subject to customary closing conditions including the approval of the stockholders of both CECO and PMFG and antitrust approval. CECO has received a financing commitment from Bank of America Merrill Lynch, as Lead Arranger and Administrative Agent, to increase and amend its existing senior credit facility in connection with the merger. The board of directors of each of CECO and PMFG has unanimously approved the transaction. CECO stockholders who combined own approximately 15% of the voting power of CECO have signed voting agreements and irrevocable proxies to vote in favor of the transaction.
CECO and PMFG's products and end markets are highly complementary and when combined will represent one of the most comprehensive product portfolios in the industry with approximately $500 million in environmental, energy and fluid handling-related revenue. Some key highlights of the combination include the following:
Enables CECO to leverage both companies' blue-chip technology portfolios and highly respected brand-name products (80 years on average) across a variety of applications. The combination of these portfolios will allow the combined company to provide a more comprehensive customer solution from a single source provider.
The combination of both silencer technology brands (Burgess Manning at PMFG and Aarding at CECO) will create a leading global manufacturer within the noise reduction and abatement market segment with expanded product alternatives and increased opportunities for the reduction of sourcing costs.
PMFG brings one of the leading Selective Catalytic Reduction (SCR) and Selective Non-Catalytic Reduction (SNCR) technologies to the portfolio, which are critical to the control of emissions in both utility and industrial power generation facilities. The addition of PMFG's SCR and SNCR technologies to CECO's product portfolio is key to its goal of becoming a complete solutions provider to its customers in the power generation and industrial end markets as well as expanding its presence along the energy value chain.
PMFG's recently acquired CCA Combustion Systems represents another significant addition to CECO's air pollution control business providing critical combustion control technologies used to reduce air pollutants at the point of combustion for a variety of facilities including utility power plants, paper & pulp mills, chemical plants, oil refineries and ethanol plants. Accordingly, CCA is an ideal technology to integrate within the OneCECO sales initiative.
Enhanced selling opportunities through each company's respective sales channels and cross-selling products to customers across all industries and geographies. Examples include the ability to sell PMFG's environmental products and services through CECO's robust sales network in China and increasing CECO's European sales through PMFG's well-established sales channels in Europe and the Middle East.
The combination will further broaden CECO's client base for after-market sales and recurring revenue as a larger installed base can be targeted. CECO has made significant investments in building a sales organization focused on targeting key purchasing decision makers at the customer level including facility operators and procurement teams, which are critical relationships to secure after-market orders. The addition of PMFG gives CECO a combined installed base of $5 billion, which significantly expands the opportunity to drive recurring revenue across the company.
Cost Reductions and Operating Synergies
The larger scale and scope of the business will generate numerous opportunities to improve the combined company's overall cost structure and create operating efficiencies. This combination is expected to generate improved margins by leveraging PMFG's impressive gross margins, while implementing CECO's Operational Excellence program. CECO will focus the initial integration efforts on the following areas:
Reducing the overlap of the combined company's global footprint by integrating their respective global supply chains, as well as increasing the operational efficiencies of the combined organization's manufacturing facilities by leveraging CECO's asset-light strategy.
Improving the efficiency of operating expenditures by consolidating service relationships, eliminating redundant activities and facilities, and driving out costs that are not tightly aligned with CECO's global growth strategy.
Combining best-in-class practices and implementing CECO's focus on SG&A efficiencies.
In the aggregate, cost savings are estimated to be approximately $15 million and are expected to be realized over 24 months following the close of the transaction. These cost savings will be implemented while CECO maintains a critical focus on strengthening customer and supplier relationships, maintaining quality control and ensuring employee retention.
Jeff Lang, Chief Executive Officer of CECO stated, "This is a major step in the evolution of CECO and we are very excited to bring PMFG into the CECO family. PMFG's product portfolio is highly complementary to our existing businesses, while enabling us to expand into a number of new applications and growth markets. Not only do we see compelling potential growth opportunities, but believe by combining PMFG's operations into our own, there are significant opportunities for cost reductions that will expand margins and drive returns for our shareholders. In regard to our balance sheet, CECO has a solid history of generating strong free cash flow, which we will use to quickly drive our debt coverage ratio back towards our target of 2.0 times."
Mr. Lang continued, "I would like to thank the PMFG team for their significant work and effort on this endeavor. PMFG has a world class operation with strong talent throughout the organization. We are looking forward to their contributions at CECO. Our organizations have a shared vision of global growth, margin expansion and generating long-term value for our shareholders."
Peter J. Burlage, Chairman and Chief Executive Officer of PMFG commented, "We are excited to be joining forces with CECO and believe the scale and synergies generated by this combination are superior to what could be captured by either organization independently. Furthermore, the structure enables our shareholders to participate in the upside opportunity. The PMFG team is looking forward to working with the CECO team to drive this transaction forward to the benefit of our customers, shareholders and employees."
Jason DeZwirek, CECO's Chairman stated, "We have admired PMFG's product portfolio and gross margins for a number of years and spent considerable time analyzing a potential combination. We believe there are significant strategic and financial benefits to the transaction. This is a unique situation and there are very few opportunities to find companies with such a complementary mix of technologies, customers and geographies. We expect the combined business will be a market leader across numerous categories with nearly half a billion dollars in sales and will have a unique global presence to better serve our customers and drive shareholder value."
Jefferies LLC is serving as financial advisor to CECO while Stifel is serving as financial advisor to PMFG. Squire Patton Boggs (US) LLP is serving as legal counsel to CECO and Jones Day is serving as legal counsel to PMFG. In support of this transaction, Bank of America Merrill Lynch, as Lead Arranger and Administrative Agent, has provided a financing commitment for a $25 million increase and amendment to CECO's existing $195 million Senior Credit Facility.
ABOUT CECO ENVIRONMENTAL CORP.
CECO Environmental Corp. is a leading global environmental, energy and fluid handling technology company. Through its well-known brands, CECO Environmental Corp. provides a wide spectrum of products and services including dampers & diverters, cyclonic technology, thermal oxidizers, filtration systems, scrubbers, fluid handling equipment and plant engineered services and engineered design build fabrication. These products play a vital role in helping companies achieve exacting production standards, meeting increasing plant needs and stringent emissions control regulations around the globe. CECO Environmental Corp. globally serves a broad range of markets and industries including power, municipalities, chemical, industrial manufacturing, refining, petrochemical, metals, minerals & mining, hospitals and universities. CECO Environmental Corp. is focused on building long-term shareholder value by bringing its unique technology, portfolio and operational excellence to strategic key growth markets around the world, while maintaining the highest standards of employee development, project execution and safety leadership.
CECO Environmental Corp. is listed on NASDAQ under the ticker symbol "CECE". For more information about CECO Environmental Corp., please visit the company's website at www.cecoenviro.com.