Terex (TEX +9%), a manufacturer of aerial work platforms and materials processing machines, is soaring today after agreeing to purchase Dover's (DOV -1%) Environmental Solutions Group (ESG) for $2.0 billion in cash. On the other hand, DOV is experiencing a modest decline as investors react to the deal. Despite DOV reaching all-time highs last week, some profit-taking is expected.
Terex agreed to pay around 8.4x FY24 EBITDA for ESG, including expected synergies of approximately $25 million by 2026. This valuation aligns closely with TEX's consolidated multiple. The transaction is anticipated to close in the latter half of this year.
Although TEX shares have surged today, significant upside potential remains, especially with the addition of ESG.
- Last quarter, ESG was on track to generate pro forma LTM revenues of $1.4 billion, significantly boosting TEX's overall business, which produced sales of around $5.2 billion in FY23. ESG's EBITDA margins, including run-rate synergies, are expected to add 130 basis points of margin accretion.
- ESG is part of DOV's Engineered Products segment and primarily serves North America, leading in refuse collection vehicles and waste compaction equipment. This aligns with TEX's goal to expand into new geographies and products. The acquisition will increase TEX's North American revenue exposure to 65% and broaden its total addressable market (TAM) to $40 billion.
- TEX is optimistic about waste recycling, anticipating increased demand throughout FY24. Waste recycling is relatively non-cyclical, ensuring consistent demand regardless of economic conditions.
- Given the similarities between TEX's existing environmental business and ESG, integration should be smooth. TEX expects significant financial benefits quickly, targeting double-digit percentage accretion in adjusted EPS by 2025, with further growth thereafter.
In 2024, TEX has experienced volatility. Investors have quickly locked in profits following the past two quarterly reports, but selling has stabilized and reversed. TEX reports Q2 results on July 30, which could see a similar reaction. Despite moderating backlogs and a subdued economic environment, TEX's near-term results might be sluggish. However, management reiterated strong customer demand across most businesses last quarter, leading to an increased FY24 outlook. By strengthening its market position with ESG, TEX is well-positioned for long-term success, even if short-term results lag.
