Prysmian to Acquire Encore Wire

Prysmian to Acquire Encore Wire

Yes, it is April but no this is not an April Fool’s Day joke … Prysmian plans to acquire Encore Wire!

The deal was announced early this morning.

According to an article on the BusinessWire,

“Encore Wire today announced that it has entered into a definitive merger agreement under which Prysmian will acquire Encore Wire for $290.00 per share in cash (the “Transaction”). The Transaction represents a premium of approximately 20% to the 30-day volume weighted average share price (VWAP) as of Friday, April 12, 2024 and approximately 29% to the 90-day VWAP as of the same date.

At the terms of the Transaction, Encore Wire’s implied Enterprise Value is approximately €3.9 billion¹ representing a multiple of 8.2x EV/2023A EBITDA and 6.3x EV/2023A EBITDA including run rate synergies.

“We are pleased to have reached an agreement that reflects the remarkable value Encore Wire has created with our expansive single-campus model, low-cost production, centralized distribution and product innovation,” said Daniel L. Jones, Encore Wire’s Chairman, President and Chief Executive Officer. “This transaction maximizes value for Encore Wire shareholders and provides an attractive premium for their shares. Encore Wire and Prysmian are two highly complementary organizations, and we anticipate a bright future for Encore Wire as part of Prysmian. Furthermore, as part of a larger, global operation, we expect this transaction will bring additional future opportunities for our employees, whose dedication and hard work made this transaction possible. We look forward to working with Prysmian to complete this value-enhancing combination and realize the significant benefits that we expect it will bring to all of our stakeholders.”

“The acquisition of Encore Wire represents a landmark moment for Prysmian and a strategic and unique opportunity to create value for our shareholders and customers,” said Massimo Battaini, Prysmian designated Group CEO. “Through this acquisition, Prysmian will grow its North American presence, enhancing its portfolio and geographic mix, while significantly increasing the exposure to secular growth drivers. We look forward to welcoming the Encore Wire team to Prysmian and benefitting from the combined company’s enhanced product offerings and customer relationships.”

Following closing of the Transaction, Prysmian expects to maintain a significant presence at Encore Wire’s vertically-integrated, single-site, McKinney, Texas campus.”

Strategic Rationale

Encore Wire is highly complementary to Prysmian’s strategy and, in particular, the Transaction will allow Prysmian to:

• increase its exposure to secular growth drivers;
• enhance its exposure to North America;
• leverage Encore Wire’s operational efficiency and best in class service across Prysmian’s portfolio;

• broaden Prysmian’s product offering enabling the combined company to better address customers’ needs in North America; and
• generate ~€140m in run-rate EBITDA synergies expected within 4 years from closing.

Pro Forma Financials

Based on pro forma aggregated results for the twelve months ended December, 2023, the combined group would have posted net sales of over €17.7 billion and adjusted EBITDA of approximately €2.1 billion⁴.

The transaction will be financed through a mix of cash on Prysmian’s Balance Sheet (€1.1bn) and newly committed debt facilities (€3.4 billion).

Approvals and Timing

The Transaction, which has been unanimously approved by each company’s Board of Directors and recommended to its shareholders by Encore Wire’s Board of Directors, is expected to close in the second half of 2024, subject to approval of Encore Wire’s shareholders representing at least a majority of the outstanding shares, regulatory approvals, and other customary closing conditions.

Under the terms of the agreement, Encore Wire may solicit alternative acquisition proposals from third parties during a 35-day “go-shop” period following the date of execution of the merger agreement. There can be no assurances that the “go-shop” will result in a superior proposal. Encore Wire does not intend to disclose developments related to the solicitation process until it determines whether such disclosure is appropriate or is otherwise required.

Thoughts on Prysmian’s Acquisition of Encore Wire

• While Prysmian is a quality company, many electrical distributors feel that Encore is the premier wire / cable supplier in its product category. The company simply “delivers”, and in every definition of the word.
• The Encore rep community will wonder, “what is next”? Down the line will Prysmian consolidate reps leaving Encore’s reps to look for other wire / cable lines?
• Will Prysmian run the business as a separate business and retain the Encore brand and service levels?
• Will Prysmian view the complementary product offerings as an opportunity to leverage distributors for other business, hence creating a bigger opportunity (or risk) for Prysmian … and stronger competition for Southwire?
• The press release mentions $140 million in synergies. While back aspects are expected, perhaps some synergies relating to purchasing of materials as well as transportation, “office supplies”, insurance, etc … but if it gets into operations, could that impact Encore’s “secret sauce.”

Will the Deal Go On?

The purchase price could be telling of what happens next.

It’s a fair offer given Encore’s market capitalization as of Friday, which was about $4.1 billion but that’s simply stock price times number of shares.

The stock closed Friday at $261. The acquisition price is $290. An 11% premium over the closing price. Given the low exchange rate of the euro, this is a great deal for Prysmian and is another example of a European company deploying funds to the fastest growing economy and acquiring a US company.

But is it valuing the potential?

With the increasing price of copper that is expected to continue to increase due to the electrification / green movement and a rebound in the construction industry and this makes the deal even better for Prysmian. In yesterday’s Copper Journal, John Gross shared “Copper, as we all know, is the Golden Key to the ‘Green Energy’ transition, wherein demand is expected to exceed production. Most recently, though, lost production has supercharged the bullish narrative, with some analysts now predicting that copper will reach $12,000 per metric tonne / $5.44 per pound within two years.”

We know, from historical precedence, that when the price of copper increases, and given that the price increased is passed on, wire manufacturer spreads widen and wire manufacturers, assuming price discipline, prosper. So, if the price increases another $1.20 / pound (or so) …

It would not be surprising to see another offer come about during the “go shop” period, possibly from private equity (and Prysmian is borrowing a little more than the acquisition price so maybe they expect a higher price or maybe this is to cover closing costs.)

Although a law firm, Ademi LLP, announced via a press release it will investigate if there was a breach of fiduciary duty and/or other violations as they state “The transaction agreement unreasonably limits competing transactions for Encore by imposing a significant penalty if Encore accepts a competing bid. Encore insiders will receive substantial benefits as part of change of control arrangements.” Whether there is any merit to this is unknown as I do not know the terms of the go-shop or break-up fees.

Will this lead to deals for other manufacturers, especially other commodity-oriented suppliers?

It was definitely an eye-opener this morning.

What is your reaction? Share below or send me your thoughts.