Cintas To Buy G&K Services; Morgan Stanley Raises Target Price

Morgan Stanley has raised its target price on Cintas Corporation (NASDAQ: CTAS) shares to $80 from $75, as it views the acquisition of G&K Services Inc (NASDAQ: GK) favorably, given the opportunity to increase route density and processing capacity, as well as potential for cross-selling.

Purchase Of G&K

Cintas agreed to buy G&K Services for $97.50 per share in cash, for a total enterprise value of about $2.2 billion, including acquired net debt. The purchase price represents a premium of about 19 percent to the closing price per share of G&K Service's common stock on August 15, 2016.

Related Link: G&K Services Acquisition A Multi-Year Catalyst For Cinta

G&K Services, with annual revenue of about $1 billion, provides branded uniform and facility services programs in the United States and Canada. Morgan Stanley said based on industry data from 2014, Cintas is the largest player in the industrial laundry and linen supply industry with 26 percent market share, while G&K is the fourth largest with 6 percent.

Analyst Take

"We believe the ~$5.50 increase in the stock price is fully reflective of the $130–$140 million of guided synergies. We also analyze the accretion/dilution of the transaction, and expect that by FY19, the deal would be ~10c accretive," analyst Toni Kaplan wrote in a note to clients.

However, Kaplan maintains the Underweight rating on Cintas, saying that it remains a cyclical company and the analyst expects the growth rate to decelerate alongside the broader market.

The analyst noted that growth will likely become challenging if labor growth softens, as Cintas has largely exhausted its geographic expansion opportunities.

"We continue to view CTAS' valuation as full, as its current price implies a 25x P/E in '17, which is a 5-turn premium to the average of Aramark (NYSE: ARMK) and UniFirst Corp (NYSE: UNF)," Kaplan continued.

Shares of Cintas closed Tuesday's regular trading at $112.99. In the pre-market hours on Wednesday, they were up 2 percent to $115.25, and at time of publication, the stock was up 1.37 percent at $114.54.

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