In its largest acquisition to date, Avon Rubber is buying the ballistic protection assets of 3M, a market leader in the US. The purchase price of an initial $91m could increase by a further $25m depending on the outcome of tenders for legacy products. Subject to approvals, the deal should complete by fiscal Q220 and be immediately earnings enhancing, creating value in FY21, its first full year of ownership. Avon has also indicated that trading remains in line with management expectations, so our forecasts remain unchanged at present. We will update our forecasts for the acquisition when it completes in FY20.
Avon is buying the assets of 3M’s ballistic protection business including the Ceradyne brand helmets and body armour activity. The acquisition is in line with one of the group’s strategic goals of creating value through targeted acquisitions to complement the existing product portfolio and add growth opportunities. It has strong positions with the US Department of Defense (DOD) supported by excellent R&D capabilities. It has just started fielding the low rate initial production (LRIP) volumes of helmets and body armour for the US DOD Soldier Protection System (SPS) programme, which should provide growth as it moves into full production. Of its $85.4m of revenues in 2018, 93% are for US customers, so Avon Protection sees further potential from leveraging its international sales network.
Subject to approvals the deal should complete in Avon’s Q220. The business generates EBIT margins of around 10% currently. Avon management believes it can generate $5m of annual cost synergies by FY21 for an upfront cost of $10m, which should leave ROIC in double digits and well ahead of WACC, creating shareholder value. The initial consideration is being funded from cash resources and an increased three-year revolving credit facility (RCF) of $85m. Group net debt to EBITDA is expected to not exceed 1.0x.
We maintain our estimates at present, in line with the trading comment, as we do not incorporate acquisitions into our estimates until a deal completes. However, we would expect an enhancement to earnings in the region of 20% in a full year post cost synergies. As the acquisition and business case is executed, we would expect Avon’s valuation to respond accordingly.