3M to buy Aearo Tech for $1.2 billion
By Ben Klayman
CHICAGO (Reuters) - 3M Co <MMM.N>, which makes products ranging from Scotch tape to optical films for liquid crystal displays, said on Thursday it would acquire Aearo Technologies Inc, a maker of hearing- and eye-protection and energy-absorbing products, for $1.2 billion.
3M said the deal for Aearo, owned by London-based private equity firm Permira and company management, would be financed through a combination of cash and other borrowings.
Last year Permira bought Aearo for $765 million. Past Permira deals have included the purchase of stakes in satellite company Intelsat and chip maker Freescale Semiconductor.
JP Morgan analyst Stephen Tusa wrote in a research note, "While we would prefer a more conservative approach to capital allocation (with more of a focus on buybacks at current levels), the Aearo deal looks like a good strategic fit as 3M gets a profitable, growing business for a reasonable price, and continues to shift the portfolio focus away from (the display and graphic business)." Tusa has an "overweight" rating on 3M.
3M said the acquisition would add to its existing line of safety, security and protection products, such as respiratory masks.
Those lines of business account for $3 billion in sales for 3M, and the St. Paul, Minnesota-based company reiterated that it wants to boost that to $10 billion.
"For some time now, we have been actively seeking the right acquisition to complement our leading respiratory position and broaden our personal safety product portfolio. Aearo is that acquisition," Jean Lobey, executive vice president in charge of 3M's Safety, Security and Protection Services unit, told analysts on a conference call.
3M can use its international reach to boost Aearo sales in Latin America and the Asia-Pacific region where it has minimal presence, he added.
Lobey said 3M is the leader in the respiratory and protective clothing markets, and adding Aearo will give it a similar position in the hearing protection segment.
The deal also will leave 3M as the second-largest player in the head, eye and face protection market and give it a growing presence in the fall protection segment.
3M said the deal is not expected to close until the first quarter of 2008 and will not affect its 2007 profit forecast.
Chief Financial Officer Patrick Campbell said 3M expects the deal to have no impact on 2008 earnings. In response to a question on the call, he said it was "a fair assumption" Aearo would add 5 cents to 10 cents a share to earnings in 2009.
"This one we studied very, very long, very, very hard, and it looks just an absolute slam dunk for us," 3M Chief Executive George Buckley said.
Aearo, based in Indianapolis, Indiana, makes hearing-protection devices, communication headsets, safety goggles, face shields, reusable and disposable respirators, fall-protection equipment and hard hats.
Hearing-protection products account for more than half of the company's sales, with eye protection making up another 23 percent.
Aearo, which employs 1,700 people, has posted a compound annual sales growth rate of more than 12 percent over the past five years, reaching $508 million in the latest year.
Campbell offered what he called a conservative annual estimate for 10 percent sales growth at Aearo through 2012, reaching $818 million. He estimated earnings before interest, taxes, depreciation and amortization will rise to $213 million in 2012 from $107 million this year.
3M sees what it called conservative cost savings from the deal of about 1 percent, or about $20 million a year.
Aearo, which will operate as a stand-alone entity under 3M, also markets systems solutions and energy-absorbing materials incorporated into other manufacturers' products to control noise, vibration, shock and temperature. That segment accounts for 15 percent of sales.
3M's financial adviser for the deal was Lehman Brothers; law firm Fried, Frank, Harris, Shriver & Jacobson said it represented Aearo and Permira.
3M shares were off 28 cents at $79.93 in afternoon trading on the New York Stock Exchange.
(Reporting by Ben Klayman; Editing by Brian Moss and John Wallace)