Schaffner strengthens its position in the US with the acquisition of Trenco

Acquisition details

Schaffner announced an acquisition of three subsidiaries of Transformer Holding LLC, namely Transformer Engineering LLC, Magnetics Technologies LLC and Transformer Real Estate LLC (together known as Trenco) for CHF9mn (approximately USD10mn). Trenco is a US based company that develops and manufactures customized power magnetics solutions. It reported revenues of CHF12mn with EBITDA margin in mid-to-high single digits translating to a trailing price-to-sales multiple of 0.75x. Schaffner will pay USD9.6mn upfront, with the rest being an earn-out and will finance the deal through extension of current credit lines. The acquisition confirms Schaffner's commitment towards its Buy-and-Build strategy for the Power Magnetics division.

Changes to the model

We have increased our FY14 revenue forecast to CHF222mn (previously CHF210mn, company guidance CHF220mn). Our FY14 EBIT is now CHF16mn compared to CHF15mn earlier, with group EBIT margin of 7.4% due to one-time corporate costs of CHF0.5mn. Consequently, we expect the group's FY14 diluted EPS to be CHF19.8 from CHF18 in our last update.

Our view

The acquisition gives Schaffner access to Trenco's clients and helps it strengthen its position in the strategic growth markets such as rail technology, energy-efficient drive systems and renewable energy. 50% of Trenco's products are complimentary to Schaffner's product line, and the combined entity now offers the largest portfolio of power quality solutions w/w. The acquisition also offers the group an opportunity to leverage its global sales and distribution network to market Trenco's products.

The transaction will help Schaffner strengthen its presence in the US market and give it access to Trenco's products that are US regulatory approved and ready for marketing. Looking at the deal multiples, at 0.75x 2013 revenues, the acquisition is at a discount to what Schaffner's product peers trade at (1.46x). After the acquisition, Schaffner becomes the fourth largest company in the Power Magnetics space and gets a boost towards achieving its target of becoming the second largest in the world. We feel that Schaffner trading at a discount to its peers (25%, 31% and 25% on EV/EBITDA, EV/EBIT and P/E measures respectively) is unwarranted given its focused growth strategy and expanding margins.