Having gained CFIUS approval on 20 December 2019, Avon has completed the $91m acquisition of 3M’s ballistic protection assets announced in August. We update our forecasts for the acquisition, consolidated from 2 January 2020. Our FY20 EPS estimate is enhanced by 5% and, allowing for the full $5m annual benefit of cost synergies, FY21e EPS increase by 20%. The resultant FY21e P/E rating of 18.1x represents a 20% premium to UK defence peers, which we feel is justified by the high returns, strong cash generation and consistent execution of the growth strategy.
Avon Rubber has now completed its largest strategic investment to date, the purchase of the ballistic protection assets formerly owned by 3M for an initial $91m. The business being bought includes the Ceradyne brand helmets and body armour activity, which predominantly services the important US defence and security market, especially the US DOD where Avon Protection already has strong positions in mask systems. The deal is consistent with the three-pronged growth strategy that includes targeted acquisitions, adding a market-leading business that extends Avon Protection’s portfolio. Avon should be able to leverage its well established international sales network to augment growth.
We expect the deal to be immediately earnings enhancing before an indicated $10m exceptional cash charge against integration costs, which should generate $5m of annual cost savings from FY21, increasing EBITDA margins of the acquired business to around 18.5% from 12.6% in 2018. The deal is thus expected to be value creating in its first full year in FY21. We have assumed low single-digit sales growth for the business in the medium term, which has annual sales of around £65m. The initial acquisition cost of $91m (£70m) could increase by a further $25m depending on the outcome of tenders for legacy products. We expect any additional business these generate to further enhance returns from the deal.
The market has already discounted the benefits from the acquisition, with the share price having risen by almost 35% since it was first announced. The organic progression of the group in both protection and dairy markets was confirmed by the FY19 results in November which, combined with a stronger cash flow expected in FY20, warrants the premium rating against its UK defence peers. We expect management to provide a trading update at the AGM later this month.