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Emerson to Buy SPX Stake in EGS Electrical

Zacks Equity Research

Emerson (EMR) will become the sole owner of EGS Electrical Group as it has agreed to acquire the 44.5% minority stake of SPX Corporation (SPW). Valued at $571 million, the deal is expected to close in the first quarter of 2014, subject to regulatory approvals. EGS Electrical Group is a joint venture between SPX Corporation and Emerson, where the latter had a majority stake.  

Emerson intends to merge the EGS sales in its Industrial automation segment. Post integration, SPX’s controlling interest in EGS will cease to exist. Emerson expects this transaction to be accretive to its fiscal 2014 earnings.

EGS Electrical Group operates in the niche market and is a leading manufacturer of electrical products for commercial, industrial, hazardous and adverse environments. Its operations are primarily concentrated in North America and its major source of revenue is from the oil and gas and chemical markets. Both sectors together generated about 50% of total revenue for the group.   

The deal is a win-win situation for both the companies as after acquiring a 100% ownership, Emerson will be able to further strengthen its position in the oil and gas and chemical market opportunities. In the energy industry, these are the two sectors which are witnessing increasing demand.

On the other hand, SPX Corporation, through this divestiture, will become more focused on its flow end markets. The divestiture is expected to generate an after-tax gain of approximately $300 million, or $6.50 per share, in SPX Corporation’s first quarter results. Through the proceeds of this sale and the available cash on hand, SPX Corporation intends to allocate approximately $500 million for share repurchases and about $300 million for reducing its debt.   

Emerson believes that the deal comes at an opportune time, as the company is witnessing emerging opportunities in its Industrial Automation and Process Management segments’ end markets. Therefore, the company will be able to fully benefit from the synergies arising out of this acquisition.

Emerson in the recent past has been restructuring its portfolio for the past three months primarily to focus on the growing oil and gas and chemical markets. In Sep 2013, Emerson had acquired India-based private company Virgo Valves to strengthen its Process Management division’s presence in the high potential oil & gas industry.

Following this, in Oct 2013, Emerson acquired Enardo LLC to expand its Process Management division’s storage tank solutions for oil & gas, and petrochemical and chemical industries. With complementing business line, geographic synergies and perfect alignment of business strategy, these acquisitions are expected to boost Emerson’s Process Management revenues probably within the first year itself.

This apart, in Nov 2013, Emerson had divested 51% stake in its embedded computing and power business to focus more on its core business.

Emerson currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the oil & gas and utilities sector include AO Smith Corp. (AOS), Rexnord Corp. (RXN) and Alamo Group, Inc. (ALG). AO Smith Corp has a Zacks Rank #1 (Strong Buy), while Rexnord Corp. and Alamo Group both carry a Zacks Rank #2 (Buy).

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