ANN (large personal protection equipment provider) out with a cap raise to buy the Kimberly Clark PPE arm.

For the first time in a while, we (Aequitas) are pretty excited about a bit of M&A.

Whilst I don’t think the timing is 100% ideal, in that ANN have been recovering from an 18 month destocking event, which has weighed on sales and earnings, I think the complementary fit of the business is, essentially, excellent, and therefore sometimes you’ve just gotta pull the trigger.

KC are a willing seller (it was KC’s idea to sell, not ANN’s approach to buy) with a highly regarded product offering, and sales capability (it’s not manufacturing, KC design, but out-source the manufacturing) that is #1 by share in markets complementary to ANN (e.g. stronger in North America, with ANN stronger in EMEA) at a sales price (EBIT multiple) that is below what ANN presently trades on.

Both KC and ANN are through the destocking event, which means cyclically depressed earnings, in a growth segment (the Life Sciences section has grown well, and continues to grow well), and, if believed (or rather if executed well) would deliever double digit EPS growth (inc synergies) over time.

The KC business is substantially higher margin, and the ANN balance sheet in good enough nick that they can takeover/integrate the business, without ND/EBITDA getting to “worrisome” levels.

There’s something a bit vague or ephemeral about acquisitions; sometimes you listen to the sales presentation/pitch and feel it is “empire building” or “just not that clear a rationale”. Sometimes it comes across as underwhelming, flat, uninspired; these are all adjectives to describe what is unclear, and the unclear bit is the future, how does it all play out.

In this case, whatever magic is ascribed to confidence, enthusiasm, articulation, feels very much in ANN’s favour. We’ve been through a few of these acquisitions of late (Treasury, with DAUO, Orora, with Saverglass) and in both instances felt it was much more “52% vs 48%” for how it would work out. DAUO seemed like overpaying for good assets, and possibly covering up a sales slowdown in the rest of the business, Saverglass felt like buying an over-earning business for cheap in a part of the world with no plausible synergies. In both instances, the share price moved quite quickly to reflect the markets concerns, in TWE’s case, there was no downgrade (at least, not yet, famous last words obviously, but there was a positive catalyst in the form of tarrif removal) and in ORA’s case the downgrade did come, and a cheap stock got even cheaper.

In ANN’s case, we feel the acquisition is highly complementary, compelling, logical, and a bunch of other words that indicate a much higher degree of confidence on how the whole thing will work out, overall.

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