Terex Corporation has officially announced a definitive agreement to acquire Environmental Solutions Group from Dover Corporation in a deal worth $2 billion. Markedly enough, when adjusted for the present value of expected tax benefits of approximately $275 million, the purchase price ends up settling around $1.725 billion. This translates to approximately 8.4x 2024E earnings before interest, taxes depreciation and amortization (EBITDA) including expected run-rate synergies. Talk about the acquired ESG group, it happens to be a leader in the design and manufacturing of refuse collection vehicles, waste compaction equipment, and associated parts and digital solutions. In essence, the company consists of several industry-leading product brands, including Heil, Marathon, Curotto-Can, and Bayne Thinline, as well as digital solutions offerings 3rd Eye and Soft-Pak, all of them recognized throughout the industry for their quality, durability, reliability, unmatched service, and leading customer return on investment. A detail, however, which contextualizes the importance of this acquisition is how ESG’s broad array of turnkey products and services across equipment, digital and aftermarket offerings are actually complementary to Terex’s businesses. This means it will allow the company to expand its customer base, provide its existing clientele with a broader suite of environmental equipment solutions, and realize economies of scale. Making the synergy between companies even better is the fact that ESG has demonstrated a reliable track record of consistent growth, delivering a 7%+ long-term organic revenue CAGR over the last ten years.
More on what the acquisition is expected to do for Terex will reveal a promise of installing meaningful scale and significantly reducing cyclicality. This the deal will achieve using ESG’s ability to deliver high-single digit organic growth through the cycle. Next up, the development will leverage ESG’s EBITDA margin, including run rate synergies, to add 130 basis points of margin accretion. Hence, moving forward, Terex will have approximately $1 billion in pro forma EBITDA. Beyond that, the company will even try achieve $25 million of identified synergies by the end of 2025. Such a pursuit is likely to be driven by procurement, supply chain efficiencies, and commercial initiatives. Another detail worth a mention here is rooted in ESG’s position as a leader in refuse collection vehicles and waste compaction equipment in North America, a position which will enable Terex to create three market-leading business segments and lead the charge in fast-growing waste and recycling end-market.
“This acquisition announcement of ESG marks an incredibly exciting milestone in our multi-year transformation and aligns with our goal of strengthening our portfolio and leveraging our operating system to drive sustainable, accelerated long-term growth,” said Simon Meester, CEO and president of Terex. “ESG will add a non-cyclical, financially accretive, and market-leading business to Terex’s portfolio with tangible synergies in the fast-growing waste and recycling end market. In addition, ESG is led by a world-class management team and has a strong track record of operational excellence.”
Among other things, the acquisition allows Terex to significantly bolster its attractive addressable market in North America. Owing to that, the company’s North American exposure will increase to 65%, expanding its global market opportunity to $40 billion. Rounding up highlights would be the way ESG’s efficient operating model with low net working capital will drive a meaningful improvement in free cash flow accretion, thus cutting back on capital intensity.
We referred to the deal’s finances, but what we still haven’t covered is that Terex has obtained fully committed debt financing from UBS Investment Bank and expects to fund the transaction with a combination of cash on hand and debt financing. Furthermore, the company expects a 2024 net leverage ratio of 2.2x, below its stated target of 2.5x through the cycle. It also anticipates net leverage below 2.0x by the end of 2025 with consistent deleveraging thereafter from an enhanced free cash flow profile.
