By Abilash Prabhakaran (MIT)
Photo: Naseem Buras (Unsplash)
Overview of the deal
Acquirer: CNH Industrial
Target: Raven Industries
Implied Equity Value: $2.08 billion
Total Transaction Size: $2.14 billion
Closed date: Q4 2021
Acquirer advisors: Goldman Sachs, Barclays
Target advisor: JP Morgan
Raven Industries has been a market leader in precision agriculture due to its advanced product expertise and software tools. As CNH hopes to expand into the precision agriculture market, which has strongly grown through a recently unprecedented focus on ESG, CNH can expect to better deliver efficient farming solutions to its customers. The deal is expected to generate $400 million in revenue synergies and $150 million in increased EBITDA by 2025. One major advantage is that CNH and Raven have had a strong partnership; thus these transactions help CNH consolidate and better capture the precision agricultural market. Competitively, Raven’s expertise can help improve CNH’s precision agriculture business’s operating margin to be more in line with competitors. Currently, CNH’s agricultural division has reported an operating margin of 13.1%, while competitors like John Deere have reported operating margins of 21.7% for their precision agriculture division. Bringing in the leadership from Raven industries can help CNH drive operational excellence and potentially establish better operational standards.
“Precision agriculture and autonomy are critical components of our strategy to help our agricultural customers reach the next level of productivity and to unlock the true potential of their operations.” - Scott Wine, CEO of CNH Industrial.
Company Details: (Acquirer - CNH Industrial)
CNH Industrial (NYSE: CNHI) is a global capital goods provider to industrial companies. CNH provides machinery for agriculture, earthmoving, busing, quarry and construction, firefighting, defence, engines, and transmission.
Founded in 2012, headquartered in Amsterdam, Netherlands
CEO: Scott Wine
Number of employees: 63,000
Market Cap: $22.4 billion (as of 10/07/2021)
EV: $38.8 billion
LTM Revenue: $28.0 billion
LTM EBITDA: $1.9 billion
LTM EV/Revenue: 1.4
LTM EV/EBITDA: 20.4
Company Details: (Target - Raven Industries)
Raven Industries (NASDAQ: RAVN) is the leader in precision agriculture, high-performance speciality films, and aerospace and defence solutions. The company is underpinned by innovative autonomous systems that are critical in agriculture, national defence, and scientific research.
Founded in 1956, headquartered in Sioux Falls, South Dakota, USA
CEO: Dan Rykhus
Number of employees: 1,300
Market Cap: $1.4 billion (as of 18/06/2021)
EV: $1.33 billion
LTM Revenue: $374.4 million
LTM EBITDA: $37.1 million
LTM EV/Revenue: 3.6
LTM EV/EBITDA: 35.8
Projections and Assumptions
This deal is accretive because it was completely financed with cash and because Raven is profitable, which would increase CNH’s EPS. Within one year, CNH will get a stronger portfolio of solutions integrated into its existing portfolio of industrial solutions. Additionally, CNH will bring on a management team that is more experienced in precision agriculture than the current team at CNH. Upon announcing the deal, CNH’s stock has been flat. This shows that the market is relatively neutral to the deal, which is positive given the extremely high valuation multiple.
Over the long term, CNH could become a market leader in precision agriculture with Raven’s portfolio of industry-leading solutions. Thus, this deal capitalizes on new upselling opportunities via Raven’s higher-end technology and cross-selling by giving both CNH and Raven’s customers’ new solutions through a more robust product portfolio. These synergies are expected to result in an increase in CNH’s revenue by $400 million and CNH’s EBITDA by $150 million, all by 2025. Overall, this deal capitalizes on the growing global market of precision agriculture, which is expected to have a CAGR of 13.1% from 2021 to 2028 and be worth $16 billion by then. This market is strongly driven by advances in IoT and analytics software. Thus, Raven’s strong software product help CNH be positioned to supply farmers with the best tools. Additionally, the increase in demand for ESG-aware solutions is forcing industrial companies to provide more environmentally safe and sustainable solutions. In fact, of $17 trillion globally invested in ESG issues, $4.5 trillion, almost a quarter, is devoted to sustainable agriculture. Thus, as CNH tries to compete in an increasingly ESG-aware world, Raven’s technology best supports customers focused on sustainable and cost-efficient methods over the long term.
Risks and Uncertainties
This deal may fail because it still requires shareholder approval. However, it will most likely pass because of the high valuation multiple CNH is offering to buy Raven. Yet, the high valuation multiple creates a major risk for CNH; because the 60x EV/EBITDA multiple is not representative of the capital intensity of an industrial firm like Raven. Currently, Raven’s LTM EBIT is $26.3 million; this makes the deal have an EV/EBIT multiple of 81.4x. Thus, the high multiple is driven by extremely strong growth expectations by CNH that Raven will cement it as the global leader in precision agriculture. Therefore, unrealized synergies and growth could cause this deal to be a gross misuse of capital, which could have been invested in other areas. Regardless, the agriculture segment accounts for almost 40% of the company’s overall revenue and 70% of its overall EBIT. Therefore, while acquiring in the agriculture market was inevitable, the high valuation could make this deal a poor transaction. Finally, this acquisition suffers the risks of any other deal in terms of cultural fit and proper integration. CNH is a European firm, and Raven is an American company; while adding Raven’s management team is seen as a strong advantage to the deal, poor retention of that team would only make it harder for CNH to realize its expected synergies and goal of being a market leader.
“Part of Raven’s commitment includes delivering groundbreaking innovation by developing and investing in our core capabilities and technology. By coming together with CNH Industrial, we believe we will further accelerate that path as well as bring tremendous opportunities and value to our customers — once again fulfilling our purpose to solve great challenges.” – Dan Rykhus, CEO (Raven Industries)