REG - Diploma PLC - Acquisition

DiplomaAnnouncement

27/03/2024 07:00

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RNS Number : 4162I  Diploma PLC  27 March 2024

     10-11 CHARTERHOUSE SQUARE, LONDON EC1M 6EE

     TELEPHONE: +44 (0)20 7549 5700

 

27 March 2024

 

This announcement contains inside information

 

 ACQUISTION OF US-BASED SPECIALTY

 FASTENERS BUSINESS

 

 

Diploma PLC ("Diploma" or the "Group"), the international value-add
distribution group, is pleased to announce the proposed acquisition of
Peerless Aerospace Fastener LLC ("Peerless"), a market-leading distributor of
specialty fasteners into the US and European aerospace markets for ca. £236m
($300m). The transaction is expected to complete in the next few weeks
following customary regulatory clearances.

 

·      A high quality business: Peerless is one of the largest
independent value-added distributors of aerospace fasteners with a strong
reputation for quality and breadth of product, speed to market, and value-add
customer service. This customer proposition has driven a long track record of
organic growth of ca. 9% and has enabled ca. 30% operating margin.

·      Strong strategic fit: the acquisition will add to our established
position in aerospace fasteners, extending our capability from aircraft cabin
to airframe, accelerating organic growth by significantly expanding our
capability in the US with an enhanced product offer and further penetrating
key strategic markets in Europe.

·      Attractive valuation: ca. £236m represents a multiple of ca. 7x
FY24 EBIT and a year one ROATCE of 15%, well in excess of our cost of capital.
It will be immediately accretive to Group growth and operating margin and
drive 8% EPS accretion in the first 12 months of ownership.

 

Positioning behind structurally growing end markets

Aerospace fasteners represents a ca. $7 billion, highly fragmented addressable
market. They are highly specialised products and amongst the most critical
components in aircraft manufacturing. An aircraft contains ca. 1 million
fasteners, representing up to 5% of total aircraft build value. There is
currently a 10+ year backlog for commercial aircraft manufacture, and the
combination of new build and ongoing maintenance supports sustainable
long-term market growth. Diploma has operated successfully in this space for
more than a decade through our Clarendon business, which has delivered
sustained double digit growth, and to which Peerless is highly complementary.

 

Peerless is a strong strategic fit

Peerless, which was founded in 1952 and is headquartered in Farmingdale, NY,
is an approved supplier to all major aerospace companies globally, primarily
serving ca. 80 sub-contractors to the principal OEMs. It is a business that we
have been tracking, and building a relationship with, for some time. It
demonstrates all of the core characteristics we look for in acquisitions:

·      Quality value-add business: similar to Clarendon, Peerless'
market-leading reputation and value-add is based on product tracking and
traceability; scheduled inventory management; customised kitting; and custom,
automated VMI solutions. This is reflected in strong operating margins of ca.
30%.

·      Impressive organic growth track record, exciting potential: the
business has delivered long-term organic revenue CAGR of ca. 9% and has
significant headroom for continued growth in fragmented markets.

·      Excellent management team: a highly experienced management team,
led by Bill Way and Don Russo, has successfully grown the business for over 20
years. There is strong cultural alignment and we are delighted that they will
remain with the business under Diploma's ownership, within our Controls
Sector.

Peerless will be very complementary to our existing business and has strong
alignment with our growth strategy:

 

·      Product range extension to expand addressable markets: Peerless
significantly extends our value-add fastener solutions for aircraft with the
addition of airframe fastening solutions to Clarendon's existing focus on
cabins. Peerless also provides solutions to accelerate Clarendon's growth in
the Defence and Space markets.

·      Penetrating further into core developed geographies: Peerless
will extend our US reach from predominantly West Coast to national, and
extends our capabilities in Europe.

·      Cross-sell opportunity: there are clear opportunities to cross
sell Clarendon product to Peerless customers in the US and Europe and vice
versa.

 

Compelling financial rationale

As a quality compounder, Diploma has a long track record of accelerating
organic growth through selective acquisitions. Over the last five years, we
have invested ca. £1 billion to acquire 37 businesses collectively delivering
ROATCE of 16% and growing, whilst maintaining balance sheet discipline.

 

The acquisition of Peerless will continue this track record of strong capital
returns as well as being immediately accretive to Diploma's organic growth and
margins. Peerless has delivered long term organic revenue CAGR of ca. 9% and
has EBIT margins of ca. 30%. In the first 12 months of ownership, Peerless is
expected to be accretive to Group EPS by 8% and achieve a ROATCE of 15%, more
than covering the Group's cost of capital.

 

For the 12-month period ended 30 September 2023, Peerless generated revenue of
$107.7m and EBIT of $33.5m. Gross assets at the end of the period were ca.
$84m.

 

Funding

The Group has recently completed the restructuring of its balance sheet to
provide the capacity and flexibility for sustained profitable growth. In July
2023, the Group refinanced its existing bank facilities with a £555m
syndicated Revolving Credit Facility maturing in July 2028, with two 1-year
extension options. Earlier this month, the Group supplemented this with a
successful debut US Private Placement issuance, raising €250m with a mix of
7, 10 and 12 year maturities at an all-in blended fixed coupon of 4.28%.

 

For the acquisition of Peerless, an initial payment of ca. £228m will be made
in cash to Polar Holdings Inc. on closing, with the remaining 3.5% to be paid
to management based on Peerless's FY27 performance.

 

Our balance sheet remains strong, with flexibility for continued investment;
year-end leverage is expected to be ca. 1.3x, assuming no further
acquisitions. We expect Group ROATCE to remain strong, at ca. 18%, consistent
with FY23.

 

Johnny Thomson, Diploma's Chief Executive said:

"Peerless is an excellent acquisition for Diploma, aligned to our strategy of
building high quality, scalable businesses for sustainable organic growth.
Bill, Don and our new Peerless colleagues have created an exceptional
value-add business with a very strong market reputation and I am delighted to
welcome them to the Group. We know and like the aerospace fasteners market and
Peerless significantly extends our US capabilities and adds scale in Europe.
The business is already generating strong performance and there are
significant opportunities to enhance returns by working together across our
existing businesses. We expect Peerless to extend our track record of
acquisitions that drive organic growth at great returns, as part of our focus
on continuing to deliver sustainable quality compounding."

 

Analyst call

Johnny Thomson, Chief Executive Officer, and Chris Davies, Chief Financial
Officer, will host a conference call for analysts and investors this morning
at 8:00am (UK time).

Conference call dial in details:

Pre-registration

https://event.loopup.com/SelfRegistration/registration.aspx?booking=diDMaYJcfL5uj5PjL5ZH0GcFWMZ5uEqpDyiozGm34t4=&b=2389e96d-457b-46a8-bebb-fec356d5b031
(https://event.loopup.com/SelfRegistration/registration.aspx?booking=diDMaYJcfL5uj5PjL5ZH0GcFWMZ5uEqpDyiozGm34t4=&b=2389e96d-457b-46a8-bebb-fec356d5b031)

                Dial in

• Dial in: +44 (0) 33 0551 0200 (UK); +1 786 697 3501 (US)

• Password: Diploma Conference Call

 

 

 For further information please contact:

 Diploma PLC -                             +44 (0)20 7549 5700
 Johnny Thomson, Chief Executive Officer
 Chris Davies, Chief Financial Officer
 Holly Gillis, Head of Investor Relations

 Teneo -                                   +44 (0)20 7353 4200
 Martin Robinson
 Olivia Peters

 

 

NOTE TO EDITORS:

 

Diploma PLC is a decentralised, value-add distribution Group. Our businesses
deliver practical and innovative solutions that keep key industries moving -
from energy and infrastructure to healthcare.

 

We are a distribution group with a difference. Our businesses have the
technical expertise, specialist knowledge, and long-term relationships
required to deliver value-add products and services that make our customers'
lives easier. These value-add solutions drive customer loyalty, market share
growth and strong margins.

 

Our decentralised model means our specialist businesses are agile and
empowered to deliver the right solutions for their customers, in their own
way. As part of Diploma, our businesses can also leverage the additional
resources, opportunities and expertise of a large, international and
diversified Group to benefit their customers, colleagues, suppliers and
communities.

 

We employ c.3,500 colleagues across our three Sectors of Controls, Seals and
Life Sciences. Our principal operating businesses are located in the UK,
Northern Europe, North America and Australia.

 

Over the last fifteen years, the Group has grown adjusted earnings per share
(EPS) at an average of ca. 15% p.a. through a combination of organic growth
and acquisitions. Diploma is a member of the FTSE 100.

 

Further information on Diploma PLC can be found at www.diplomaplc.com
(http://www.diplomaplc.com)

 

Diploma hosted an Investor Seminar in June 2023. A recording is available on
our website:
https://www.diplomaplc.com/investors/results-reports-presentations/investor-seminar-2023/

 

The person responsible for releasing this Announcement is John Morrison, Group
Company Secretary.

LEI: 2138008OGI7VYG8FGR19

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