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Cummins Inc. announced a definitive all-cash agreement to purchase Meritor Inc. for $36.50 per share, giving it a transaction value of $3.7 billion.
The per share price is a 48% premium over the close on Feb. 18.
Cummins reported it expects to close the deal by the end of 2022, and the transaction is subject to approval by Meritor shareholders, regulators and customary closing conditions.
Cummins Chairman and CEO Tom Linebarger called Meritor an industry leader, and said in a statement, “The addition of their complementary strengths will help us address one of the most critical technology challenges of our age: developing economically viable zero-carbon solutions for commercial and industrial applications.”
The merger would unite two venerable and successful companies, both more than 100 years old. In their most recent financial quarters they produced, between them, net income of $452 million — driven predominantly by results at Cummins.
“We believe the most key component of the long-term bear thesis on Cummins (CMI) is the secular headwinds facing diesel,” Matt Elkott, an equity analyst at Cowen and Co., wrote in a note to investors. “However, we see the Meritor acquisition as another example of CMI’s ability to walk the thin line of maintaining and growing market share in the gradually decarbonizing diesel technologies, while at the same time helping to lead the transition to new power.”
Elkott said one way to think of it was that Cummins’ path is somewhat akin to being the Netflix of engines, not the Blockbuster of engines.
Others in the industry speculated the move comes as Cummins found out there were not any major avenues of participation in battery assembly. And, with hydrogen appearing to lack any near-term commercial viability in on-road transportation, they needed a way to diversify operations in a bigger way moving into an electrified future.
Together, we are powerful. @Cummins has signed an agreement to acquire @Meritor. The transaction will strengthen Cummins’ industry-leading range of powertrain components and accelerate the development of electrified power solutions. More below! https://t.co/uSGh0RhnSp— Cummins Inc. (@Cummins) February 22, 2022
Meanwhile, it was the second time in February that Cummins bought out a customer.
Altra Industrial Motion Corp. on Feb. 9 announced it entered into an agreement to sell its Jacobs Vehicle Systems business to Cummins Inc. for $325 million.
READ MORE: Cummins to Acquire Jacobs Vehicle Systems
JVS, whose technology is focused on engine retarding and valve actuation systems, generated approximately $193 million in revenue in 2021, according to Braintree, Mass.-based Altra.
Stephen Volkmann, managing director at the financial services firm Jefferies and Co., wrote in a note the acquisition clearly allows Cummins to offer more complete drivetrain solution that could help add market share in internal combustion engine and electric vehicle applications.
“On the other hand, we do see a scenario where the acquisition of MTOR [Meritor] could pose a headwind to CMI multiples if markets simply view the acquisition as doubling down on sunsetting technologies,” Volkmann wrote.
“While the near- and medium-term return on invested capital looks compelling,” Volkmann added, “CMI management could be challenged to convince investors of the longer term merit of this purchase and how it will fit into the new power offering.”
For the fiscal first quarter of 2022, ended Dec. 31, Meritor posted net income of $58 million, or 76 cents per diluted share, compared with $33 million, 44 cents, in the previous period. That was driven primarily by lower interest expense and higher sales volumes, partially offset by net steel costs, according to the Troy, Mich.-based company. Revenue rose to $984 million, up $95 million compared with $889 million a year earlier.
As for Cummins it posted net income for fourth quarter, ended Dec. 31, of $394 million, or $2.73 per diluted share, compared with $501 million, $3.36, last year. Revenue inched up to $5.85 billion compared with $5.83 billion.
“Our industry continues to experience significant supply chain constraints resulting in elevated manufacturing, logistics and material costs resulting in margins below our expectations, particularly in the fourth quarter,” Linebarger said during an earnings call Feb. 3.
Mike Roeth, executive director of the North American Council for Freight Efficiency, noted, in the bigger picture, integration and collaboration matter when searching for the efficiencies to move freight successfully. “Electric trucks is the spark to make teaming such as this even more important.”
Meritor customers can expect enhanced technology and the ability to accelerate investment in axle and brake development and EV adoption, said Meritor CEO Chris Villavarayan. “Our global team members and their commitment to excellence helped make this transaction possible and will fuel our innovations as we embark on this next chapter in our longstanding legacy.”
Meritor’s roots date back to 1909 and the Timken Detroit Axle company. The company has grown to more than 9,600 employees serving commercial truck, trailer, off-highway, defense, specialty and aftermarket customers around the world.
Columbus, Ind.-based Cummins, founded in 1919, produces diesel, natural gas, electric and hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, electric power generation systems, batteries, electrified power systems, hydrogen generation and fuel cell products.
Associate News Editor Dan Ronan also contributed to this report.
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