By Marvin Stenersen Stockholm and Carl-Gabriel Jakobsson (Stockholm School of Economics), Jack Lee, Ryan Chan, Jeremy Darmadi and Heather Leung (HKUST)
Photo: Kevin Woblick (Unsplash)
Overview of the deal
Acquirer: Blackstone (NYSE:BX), Abu Dhabi Investment Authority, GIC
Target: Emerson Electric Climate and Technologies (NYSE:EMR)
Total Transaction Size: $14bn
Closing date: Expected to be completed in Q1 2023
Acquirer advisors: Barclays (financial), Guggenheim Securities LLC and Evercore. Simpson Thacher & Bartlett LLP (legal)
Target advisors: Centerview Partners LLC and Goldman Sachs (financial), Davis Polk & Wardell LLP (legal)
Blackstone is teaming up with Abu Dhabi Investment Authority and Singapore's GIC to buy a 55% majority stake in Emerson Electric’s tech arm at a price of $14bn, or a 12.7x FY22 EBITDA multiple. This marks it as the biggest private-equity buyout in months and a step in Emerson’s push to move more into the automation market. In the current debt markets, financing such a transaction naturally proved difficult. Blackstone, as the debt arranger, worked with the two sovereign wealth management funds, in addition to Emerson providing $2.25bn in seller financing, to arrange it. Blackstone is placing around $5bn into it directly itself, and will be run as a joint venture between Emerson and Blackstone, until its potential sale or IPO. The deal is expected to close in the first half of the calendar year of 2023, subject to regulatory approvals and customary closing conditions.
Company Details (Acquirer - Blackstone)
The Blackstone Group is a New York-based alternative investment firm with $951bn AUM and a strong global presence. It is the largest of its kind, and was founded originally in 1985 by Stephen Schwarzman and Peter Peterson as an M&A advisory boutique. That part was later spun-off into PJT Partners, and today Blackstone is instead a pure alternative asset manager still led by Schwarzman, but with Jonathan D. Gray as COO. Today they have a leading position in real estate and buyouts, but also strength in credit and corporate private equity. Currently they have $277bn in PE, and they are currently in the process of raising money for their new fund IX targeting a close in Q1 2023.
In 2021, they had total revenues of around $22.6bn with a FRE/share (fee-related earnings/share) of $3.37 and a solid FRE Margin of 56.3%, with most of their earnings coming from their Real Estate and Private Equity businesses, while ending the year with a total pool of dry powder of $135.8bn, most of which was in Private Equity.
Founded in 1985, headquartered in New York City, United States
CEO: Stephen A. Schwarzman
Number of employees: 3,795 (2021)
Market Cap: $64.6bn (as of 31/12/2022)
LTM Revenue: $11.8bn
LTM Net Income: $2.6bn
Trailing P/E: 25.0x
Company Details (Target - Emerson Electric Climate and Technologies)
Emerson (NYSE: EMR) is a highly diversified technology and engineering multinational with operations spanning across 250 manufacturing facilities. The Fortune 500 company caters to end markets for Automation and Commercial & Residential solutions, and is a leading provider of Climate Technologies, in particular, Copeland compressors and HVAC systems (heating, ventilation, and air conditioning). Marking its 26th divestiture, Emerson’s sale to The Blackstone Group follows earlier sales of non-core businesses Therm-O-Disc and InSinkErator in 2022, further highlighting the firm’s accelerated efforts towards establishing itself as a “pure play automation company”.
Founded in 1890, headquartered in St. Louis, Missouri (USA)
CEO: Lal Karsanbhai
Number of employees: 18,000
FY22 Revenue: $5bn
FY22 EBITDA: $1.1bn
FY22 EV/Revenue: 2.80x
FY22 EV/EBITDA: 12.7x
Projections and Assumptions
Blackstone's 55% stake for $9.5bn in Emerson Climate Technologies aims to further streamline the business's operations while taking on a considerable leverage play. $5.5bn of debt has already been placed by Blackstone for the acquisition, sourced from specialist funds and commercial lenders. Given the background of banks being less willing to provide debt financing, this shows Blackstone's ability to raise debt in challenging conditions. The target is set for accelerated growth as it leads the way in helping consumers and companies shift to more energy-efficient heating and cooling products as part of their carbon reduction efforts. The transaction allows Blackstone to enter an exciting climate sector and adds to Blackstone's sustainability image. Since the deal's announcement (October 31st), Blackstone's stock has been outperforming the market.
The transaction enables Emerson to monetize the Climate Technologies business at an attractive valuation and receive upfront cash while retaining ownership and thus still being part of the business's development journey and potential IPO. Emerson plans to use $2bn of the proceeds from the deal on share repurchases in 2023. The standalone Climate Technologies business unit is an industry-leading provider of heating and air conditioning solutions, refrigeration, thermostats, controls and monitoring systems, and sensing and protection devices. Operating results for Climate Technologies, and previously announced divestitures, InSinkErator, and Therm-O-Disc, will be reported in discontinued operations in the first fiscal quarter of 2023. Emerson's continuing operations will include Automation Solutions, Safety & Productivity, and AspenTech. The deal is expected to close in H1 2023, and as part of the transaction, Emerson plans to right-size its corporate and platform cost structure.
Emerson’s divestment is a part of its strategy to streamline its portfolio and focus on businesses with better growth prospects (i.e., intelligent devices, control systems, and industrial software). Following the divestment, the company expects its annual growth potential to increase from 1-1.5% to 4-7%. This transaction also accumulates $9.5bn in pre-tax cash proceeds for Emerson to redeploy to other areas of focus, turning the longtime conglomerate into a global pure-play automation company. Moreover, Emerson notably still retains a 45% non-controlling interest in the business, positioning the company to receive a portion of a windfall if the business is successful.
The deal’s similarity with Blackstone’s acquisition of Thomson Reuters’ (TRO) Financial and Risk business in 2018 perhaps offers an insight into Blackstone’s objectives. Within a year after closing the deal at US$20bn, Blackstone sold TRO to the London Stock Exchange Group at a valuation of US$27bn - roughly doubling Blackstone and TRO’s equity value. Blackstone also believes that the business has clear avenues for growth in technology, hence opening the opportunity for an EBITDA expansion and consequently, stronger IRR for Blackstone.
Risks and Uncertainties
Emerson believes that the divestment will help it focus on the automation solutions business. But on the flip side of the coin, it also means decreasing business diversification. The group will likely be more susceptible to the underlying risks of market competition in industrial automation without the buffer of more mature businesses like climate technologies.
There are also a couple of uncertainties for the acquirer Blackstone, which paid 12.7x of FY22 EBITDA. First of all, the unit was actually sold at a slight premium to peers that own HVAC businesses, which are trading at around 10.5x - 11.5x EBITDA. Given the pressure of potential economic downturn and current capital market conditions, Blackstone might struggle to exit at a good multiple in the near term, like what it did for Thomson Reuters. Plus, the asset manager ambitiously financed the deal with $5.5bn of debts from credit funds and commercial lenders and $2.3bn of notes from Emerson, equivalent to 7x trailing EBITDA in total. The high level of leverage and significant interest expense puts an even larger downside risk for Blackstone’s investment.
"This is a marquee transaction for our private equity business and a testament to our ability to deliver solutions to our partners even in difficult economic and market environments.” - (Joe Baratta, Global Head of Blackstone Private Equity)