$32.50/SHARE OFFER FROM PE REPRESENTS ATTRACTIVE PREMIUM
THE TD COWEN INSIGHT
Yesterday, Heroux-Devtek and Platinum Private Equity announced that they have entered into an agreement for the acquisition of all HRX shares, other than those to be rolled over by certain members of senior management, for $32.50 in cash, implying an enterprise value of $1.35 billion.
Impact: POSITIVE
We are increasing our target price to $32.50 from $28.00 based on the all-cash purchase price offered by Platinum Equity and updating our recommendation to SELL from Buy. We believe that the long-term upside potential for HRX shares is greater than $32.50, but we believe that the offer price represents an attractive return between now and March 2025 (assumed closing) when considering our 12-month target price, HRX's historical valuation multiples, and comparable company valuations. Prior to the pandemic, HRX shares traded at an average EV/EBITDA multiple that was in line with comparables, whereas it has averaged a 2.4x discount since the start of 2022. We believe that the company's M&A opportunities and higher relative cost of capital contributed to a decision to form a special committee and explore potential transactions.
The acquisition price represents a 16% premium to our previous target, a 28% premium to yesterday's close, and a 47% premium to the 90-day VWAP. Based on our estimates, the implied enterprise value implies a multiple of 14.6x F2024 (T4Q) EBITDA, 11.6x F2025E EBITDA, and 10.6x F2026E EBITDA, and compares with HRX's trailing five-year average
of 8.5x, comp-group trailing five-year average of 10.4x, and peak multiple of 10.6x (pre- pandemic). The $32.50 acquisition price implies a multiple of 32.2x F2024 EPS, 24.2x F2025E EPS, and 20.1x F2026E EPS, and compares with HRX's trailing five-year average of 18.5x and its comp-group trailing five-year average of 18.9x.
We view Heroux-Devtek as a high-quality aerospace supplier with a strong franchise, balance sheet, and management team. The company's past investments, new program wins, and civil industry back-drop are expected to drive record revenue and margins in the coming years. We forecast CAGRs of 9% and 18% in Revenue and EBITDA, respectively, over the next two years, and that the company has the potential to reach over $900 million in revenue and greater than $160 million in EBITDA by the end of the decade.
We are adjusting our financial forecasts to reflect updated FX, interest rate, OEM production assumptions, and other minor modelling assumptions.