Shares of Circor International (NYSE: CIR) jumped 43% on Tuesday after Crane (NYSE: CR) went public with a $1.7 billion offer to buy the engineered components manufacturer. Crane said it went public after its private overtures were ignored, but the Circor board is going to have a hard time ignoring Tuesday's share price movement.
Before markets opened Tuesday, pump and valve maker Crane said it has submitted a proposal to pay $45 per share in cash for Circor, a premium of 47% over the target's Monday close and 51% higher than Circor's six-month volume-weighted average. The deal values Circor at about 13.5 times adjusted EBITDA.
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Crane, in its statement announcing the proposal, said its offer had been rejected on May 13 without any discussion. In the statement, CEO Max Mitchell criticized Circor's performance as an independent, saying the "business, which has great brands and products, has been meaningfully undermanaged for years."
Circor shares prior to Tuesday's jump were down 40% over the past year. Mitchell warned that "based on Circor's history of underperformance and inability to meet its own financial targets, we believe Circor's stand-alone plan is unlikely to generate value comparable to what we are proposing."
Circor has been an underperformer, and the addition of the company's fluid-handling, aerospace, and defense businesses to Crane's portfolio would create an entity with better scale and the ability to generate growth. There has been a wave of consolidation among aerospace suppliers as companies look to bulk up to better compete and withstand margin pressure from aircraft-manufacturer customers.
The problem for Circor shareholders is that Crane's offer would still leave them down more than 10% over the past year. And because it is a cash offer, it is Crane shareholders and not Circor investors who would benefit from any upside or synergies the deal creates.
With the offer now public, it will be very difficult for Circor's board to ignore it. I'd expect to see a response from Circor including the board hiring advisors to evaluate options sometime soon. It remains to be seen whether another bidder will enter the fray or if Crane is willing to negotiate a higher price if Circor proves willing to come to the table.
Circor's board and management are now on the clock to generate a credible plan that investors believe can get the company's shares higher without the outside influence of a takeout offer. Without such a plan, shareholders are going to find Crane's offer hard to ignore.
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