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Vertiv to Acquire the E&I Engineering Group
September 2021 by Marc Jacob
Vertiv Holdings Co announced that through its subsidiaries, it has entered into a definitive agreement to acquire E&I Engineering Ireland Limited and its affiliate, Powerbar Gulf LLC (“E&I”) for approximately $1.8 billion in upfront consideration plus the potential for up to $200 million in cash, based on achieving certain 2022 profit milestones. The upfront consideration consists of $1,170 million in cash and approximately $630 million of Vertiv common stock. The transaction has been unanimously approved by Vertiv’s Board of Directors and is expected to close in the fourth quarter of 2021, subject to customary closing conditions.
Founded in 1986 by Philip O’Doherty, E&I is an independent provider of electrical switchgear and power distribution systems, pioneering unique in-house integrated power solution designs and technology tailored to individual client project needs. With annual sales of approximately $460 million (2021E) and 2,100 employees, E&I has a long heritage in the power distribution market and deep relationships with a blue-chip customer base in more than 30 countries. E&I’s products represent a critical system of the data center power infrastructure and compete in an addressable market of about $7 billion, which is expected to grow 5% annually through 2025.
Compelling Strategic and Financial Benefits
Highly Complementary Product Portfolio with Differentiated Technology. E&I’s products in critical power switchgear, UPS input and output switch gear and busway fill the remaining gaps in the Vertiv critical power infrastructure offering.
Broad Global Customer Base. Together, Vertiv and E&I will serve some of the world’s leading hyperscale cloud and colocation companies that are increasingly looking to suppliers to have a full “powertrain” capability and flexible power deployment options to support increasingly demanding power requirements.
Significant Geographic Expansion Potential. E&I today competes in North America, Europe and the Middle East. This transaction provides the opportunity to leverage Vertiv’s footprint outside of the United States, particularly in Europe and Asia to rapidly expand penetration with new customers.
Attractive Cost and Revenue Synergies. The combination is expected to yield excellent sales synergies; however no sales synergies are contemplated in the base financial model so they represent incremental upside. Vertiv expects to realize approximately $18 million in pre-tax run rate cost synergies within three years of close. Cost synergies will come from a combination of procurement, general, administrative and product costs. Revenue synergy opportunities are driven by highly complementary customers and products to support cross-selling and integrated solutions for each company’s customers.
Accretive to Vertiv’s Financial Profile. The transaction is expected to be accretive to Vertiv’s organic growth, adjusted operating margins, cash flow and EPS in 2022.
Transaction Details
Under terms of the agreement, E&I will receive upfront consideration of approximately $1.8 billion, consisting of $1,170 million in cash and approximately $630 million of Vertiv common stock, issued at the volume-weighted average closing price per share over the 60-day trading period ended Sept. 7, 2021, and equating to 23.1 million shares. Up to $200 million of additional cash consideration would be payable based upon the achievement of certain 2022 EBITDA targets, with $100 million paid if E&I achieves 2022 EBITDA of $146 million and an incremental $100 million if E&I achieves 2022 EBITDA of $156 million or higher. Assuming expected 2022 EBITDA of $150 million, the resulting $1.9 billion purchase price – including $100 million of additional consideration based upon the above thresholds – represents a multiple of about 11x 2022 EBITDA including expected run rate year-three cost synergies of $18 million.
Vertiv plans to finance the transaction with cash on hand and new debt financing, supported by committed financing. At the close of the transaction, Vertiv expects an adjusted net leverage ratio of about 3.4x net debt to adjusted EBITDA, which is expected to de-lever to approximately 2.3x by year end 2022. The company expects the transaction to close in the fourth quarter of 2021 subject to receipt of regulatory approvals and satisfaction of customary closing conditions.
Centerview Partners LLC is acting as lead financial advisor to Vertiv, and Baker McKenzie and Latham & Watkins provided legal counsel. Rothschild & Co is acting as sole financial advisor to E&I and Clifford Chance provided legal counsel. Committed financing to support the transaction is being provided by Citi, that also acted as a financial advisor to Vertiv.
Updated Business Conditions
Vertiv today also provided an update on current business conditions. Overall market demand remains robust and consistent with expectations. Orders in July and August were up approximately 12% compared to the same period last year, driven by continued strength in cloud and colocation markets. Order growth drives a record backlog of about $2.4 billion at the end of August, a 30% increase from year-end 2020.
Despite continued strong market demand, supply chain challenges described in our prior communications are trending worse than expected, with critical part shortages driving the need for additional spot buys. In some cases, the company cannot procure critical parts at any price, creating production and delivery challenges pressuring the top-line. Vertiv is taking actions to address these challenges, which are expected to continue through the first half of 2022.
Given these pressures, Vertiv is revising its guidance for the third quarter and full year 2021. The revised guidance reflects current market conditions and anticipates no improvements until next year, which Vertiv considers prudent but could prove conservative. A summary of the revised guidance compared with prior guidance is provided below:
