Reliance Worldwide Corporation Limited (ASX: RWC)

An acquisition that complements RWC’s strategy- Reliance Worldwide is a leading global manufacturer and supplier of premium-branded engineered water delivery. RWC entered into an unconditional agreement to acquire all the issued shares of John Guest Holdings Limited for GBP687.5 million (A$1.22 billion) and reflected a 12.4x purchase price multiple of John Guest’s 2017 Calendar Year Adjusted EBITDA (reducing to 10.3x including expected total synergies). John Guest is a global leader in plastic PTC fittings and has products which are complementary to RWC. It is expected that the total synergy effect from the integration of RWC and John Guest will be in excess of A$20 million EBITDA per annum and all the kinds of cost reductions from businesses and operating efficiency will be included in this integration.

This acquisition has attractive financial metrics for RWC as it is expected that transactions will be more EPS accretive that is more than 20 per cent on a pro forma FY18 NPATA basis (excluding the impact of synergies) and in excess of 30 per cent including the expected synergies. This funding will stream from a new A$750 million syndicate debt facility and will be underwritten by RWC’s existing lenders that is ANZ and CBA and by this RWC’s existing debt facilities will be increased by A$400 million. The Group will also undertake a pro rata accelerated non?renounceable entitlement offer and will raise A$1.10 billion for new equity and will include an institutional component of A$945 million. The Group will maintain a conservative balance sheet post-acquisition as well with a pro forma net debt/CY17A EBITDA of 2.3x and it is expected that leverage will be reduced further through strong earnings growth and cash flow generations over the time. The transaction will be completed in June 2018, once the institutional offer is settled.


RWC pre and post-acquisition impact (Source: Company Reports)

The Group reaffirmed its full-year EBITDA guidance that is between A$150 million and A$155 million but excluding any transaction costs related with the acquisition and without any earnings contribution from John Guest in FY18. The acquisition is said to strongly align the Reliance’s growth and acquisition strategy and will enhance the Group’s organic growth opportunities.

This acquisition is going to be a big one and thus has some risks while RWC aims to base the integration in the same manner as done for Holdrite business, still there is no guarantee that it will realise the same success. The stock climbed up by 35.3 per cent in last one year and was up by 10.14 per cent in last three months. However, it slipped by 2.77 per cent in last one month and was down by 4.8 per cent in last five days. Despite this, RWC looks “Expensive” at the current market price of $4.56 and it might be better to wait and watch for the impact from acquisition along with any price drop for an entry opportunity.

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