The announcement that Avon Rubber is to sell milkrite | InterPuls, its dairy division, to DeLaval Holding for £180m gross proceeds is strategically logical and financially compelling. The fit of dairy and defence has always looked slightly anomalous and the terms of the deal show that the opportunity to augment dairy through value-accretive deals is difficult given the scale of the business and opportunities. Management must now recycle the cash balances that will be created into Avon Protection, where there are a greater number of potential investments.
After transaction costs and tax, Avon will receive £160m of net proceeds. The terms of the sale are financially compelling for a business with below group average, midteen adjusted EBIT margins where we expect only moderate growth. The dairy activities were expected to account for just under 20% of sales and adjusted EBIT based on our FY22 estimates, and the disposal terms suggest FY22 multiples for EV/Sales of 3.3x, EV/EBITDA of 14.7x and EV/EBIT of 20.5x. At face value, the disposal is EPS dilutive by around 15% in a full year, as cash returns would likely be minimal. However, as management recycles the substantial but low-return cash balances created, it should prove accretive compared to the dairy activities. We think it is refreshing to see a management selling well, when the opportunity to invest appears limited at value-accretive terms. The deal is subject to regulatory approvals and should close in Q121 (Q4 CY20). Our forecasts remain unchanged until the deal completes.
Management should be able to use the proceeds to continue the growth strategy. The deal focuses Avon Rubber on its Avon Protection business, will allow a £20m payment to the pension fund, and pay down the RCF drawings following the Helmets and Armor acquisition in January 2020. It should leave Avon with a healthy cash balance, we estimate of c £150m at the end of FY21, with which to pursue its continued organic development and M&A opportunities, and adjacencies in the personal protection market to enhance its portfolio.
While Avon is well rated compared to its defence peers, the ability to increase growth and cash generation by recycling the proceeds is central. Assuming valuecreating investments are achieved, earnings metrics and cash-based valuations should return to more directly comparable levels.