A good way to start the new year is having one of your companies acquired.
FLIR Systems (Nasdaq: FLIR) was a recipient of a credible takeover offer. It was the first company on the S&P 500 that I made an investment in quite some time. FLIR is one of the smaller components of the index, with a market capitalization (before today) of about US$6 billion.
While I first wrote about it all the way back in 2011, I only bought shares in the company in 2020 during the COVID crisis. FLIR’s niche is in infrared imaging systems, but they have also expanded into military UAV operations. IR imaging technologies will continue to have great use in civilian and military applications.
Assuming the deal goes through, the investment will be about a 70% gain in the past 9 months.
The acquiring company is Teledyne (NYSE: TDY), another S&P 500 component which is a somewhat more diversified manufacturer of instruments and imaging equipment. Their imaging specialties in almost everything other than IR applications, including X-Ray, UV, but also long-band (microwave and RF). The acquisition is quite complimentary in nature and while I wasn’t initially thinking of Teledyne as being an acquirer, there is a certain amount of logic to the acquisition.
The offer was US$28 in cash and 0.0718 in TDY stock per FLIR share, which works out to a total of US$56 per share at TDY’s previous market value. The market does not appear to like the acquisition, however – TDY stock is down about 9% as of this writing, so the total value at present for FLIR holders, minus merger arbitrage, is about US$54/share.
Teledyne, before this acquisition, was relatively conservatively managed. In the past months of 2020, free cash flow was about US$330 million. They also announced preliminary 2020 results with GAAP earnings of about $10.30/share (US$380 million plus $32 million of restructuring, so FCF of ~US$412 million) and they also guided that the net debt position will be US$115 million (their Q3 balance sheet had approximately $450M cash, and $790M debt, so talk about good Q4 collections!).
The industry that Teledyne participates in is relatively stable. Probably the reason that their stock is trading down is because this is a relatively large acquisition in relation to their size, and the leverage on their balance sheet will bloat considerably from their historical norms. When adding FLIR’s earning power, the combined entity is still in relatively comfortable position.
FLIR’s most recent debt issue, an August 2030 unsecured bond with a 2.5% coupon, is still hovering around a 1.9% yield to maturity. The debt market appears unconcerned.
Looking at the Teledyne stock, my real quick paper napkin valuation has the combined TDY entity at around GAAP $12/share earnings, and on a US$358/share price, which gives it a current earnings of 30 times. With the leverage of an additional $4 billion in debt on the balance sheet, while this isn’t ridiculously high, it isn’t what you would consider cheap.
I’ll likely be selling at some point in the future when I’ve identified a better candidate for my USD. The half-exposure to TDY stock is acceptable for now. In the meantime, my current holdings of FLIR effectively is a happy capital parking position.
