Long-Term Play in FTV/AIMC Exchange Offer...With the Door Open for a Spin
Having been a Spinoff and generating a total shareholder return of 80.7%, outperforming the S&P 500’s return of 46.6%, Fortive Corp. (FTV) is separating its Automation & Specialty (A&S) business. However, instead of a traditional Spinoff, FTV shareholders have to exchange their shares to receive the Newco, which will merge via a Reverse Morris Trust (RMT) with Altra Industrial Motion (AIMC). However, there is still a chance of shares being distributed via a Spinoff.What’s Happening?
Fortive Corp. (FTV) is all set to split with its Automation & Specialty (A&S) business through an exchange offer that will expire on September 26, 2018 (8 am EST) and later merge with Altra Industrial Motion Corp. (AIMC) via a Reverse Morris Trust (RMT) transaction. The other portion of the A&S business will be directly sold to AIMC for $1bn. We believe that the announced separation is primarily intended to streamline FTV’s portfolio transforming into less cyclical business with higher focus into more recurring software-based solutions.
Although the separation of A&S will temporarily dilute FTV’s earnings (8% to 10%), the automation business with higher recurring revenues has better growth prospects, which will offset the dilution in the mid- to long-term. Furthermore, we believe that the ongoing exchange offer of FTV’s shares (Split off) was chosen over a Spinoff to lower the share base, which in turn will boost FTV’s EPS. On the other hand, the company has kept the doors open for a Spinoff (pro-rata distribution of shares) in the event the exchange offer is not fully subscribed.
In the exchange offer, FTV expects to issue 35m shares of Newco (Stevens Holding Company, Inc. – a Fortive subsidiary formed to hold the A&S business), however the number of shares of FTV that will be accepted in the exchange offer will depend on the final exchange ratio and the number of shares of FTV tendered. If the exchange offer is completed but not fully subscribed (exchange offer target), then the remaining shares of the Newco owned by FTV will be distributed on a pro-rata basis to FTV shareholders whose shares of FTV remain outstanding after the completion of the offer.
Altra Industrial Motion is a designer, producer and marketer of a range of electromechanical power transmission motion control products. The company's technologies are used in various motion related applications. The company's segments include: Power Transmission Technologies, which provides various coupling products, clutches, brakes, electromagnetic clutches and brakes, and gears; and Automation and Specialty, which provides rotary precision motion solutions, miniature motors and motion control products, systems that enable and support the transition of rotary motion to linear motion, and heavy-duty diesel engine brake systems and valve actuation mechanisms.
Fortive designs, develops, services, manufactures and markets professional and engineered products, software and services. The company's segments are: Professional Instrumentation, which provides products, software and services, used to create actionable intelligence by measuring and monitoring physical parameters in industrial applications, including electrical current, radio frequency signals, distance, pressure, temperature, turbidity, radiation, and hazardous gases, and used to provide critical sterilization and disinfection solutions; and Industrial Technologies, which provides critical technical equipment, components, software and services for manufacturing, repair and transportation markets.
The Edge Group - Global Fundamental Catalyst Investing. The Edge provides investors with access to hidden corporate value from Global Special Situations using a pioneering approach to investments. Founded in 2005 by fund management and investment banking professionals to provide high quality, private equity-level research on Global Corporate Divestitures for the benefit of fundamental event-driven, growth and value-oriented investors in this difficult to track, but proven investment space.
The Edge will look to screen and analyze include Spinoffs; Reverse Morris Trusts; Squeeze Outs; Privatizations; Demutualization; Deep Discounted; Rights Issues; Rights Offering; Restructuring; Insider Purchases / Buying Change of Management / CEO Change; Deteriorating fundamentals; Post-Bankruptcy; Reorganization; Tender Offer; M&A Deals; Secondary Offering; Share Swap; Thrift Conversions; Share Buybacks; Activist; Mergers. All analyzed from a fundamental point of view.
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