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August 17, 2012 8:14 pm

Gardner Denver retains Goldman defensively, for now

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This article is provided to FT.com readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors. www.dealreporter.com

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Gardner Denver (NYSE:GDI) has retained Goldman Sachs to deal with activist investor ValueAct Capital, said four industry sources.

Each of the sources said, to their knowledge, the financial advisor was not brought in on a sellside role. “I don’t see them actively running a sellside mandate. But it remains to be seen whether this will blow over or not,” said one of the sources.

On 27 July, ValueAct called on the Gardner Denver board “to engage investment bankers immediately for the purpose of soliciting offers for the company.” The push came on the heels of the Hamilton Sundstrand Industrial sale to The Carlyle Group and BC Partners for nearly USD 3.5bn announced on 25 July. It also followed the abrupt resignation of Gardner Denver CEO Barry Pennypacker on 16 July.

Gardner Denver and Goldman Sachs declined comment. Speaking on the company’s 2Q12 earnings call held 20 July, Gardner Denver’s interim CEO Michael Larsen affirmed the company’s commitment to its current strategy.

Two of the industry sources said they did not discount the potential for the advisory mandate to turn offensive especially with Goldman Sachs coming off the sale of HSI which has three divisions: pumping solutions businesses, Sundyne and Milton Roy, and air compressor manufacturer Sullair. The latter is regarded as a top comparable for Wayne, Pennsylvania-based Gardner Denver.

“I think they’ll maintain a ‘no process’ kind of attitude for sometime but you don’t hire Goldman for nothing,” said one of these sources.

Unless Gardner Denver’s board is willing to take an offer price in the mid-70s, the second source said he believed the company was likelier to remain independent. The same source estimated that in the event of a sale, Gardner Denver could command between 9x to 9.5x its “real EBITDA.” For 2011, Gardner Denver posted just over USD 460m EBITDA. The consensus estimate for the company’s 2012 and 2013 EBITDA is approximately USD 444m and USD 446m, respectively.

In the event of a sale, all of the sources said they expected the bidder pool for Gardner Denver to be comprised mostly, if not entirely, of financial sponsors, noting that strategic bids for both sides of HSI had not materialized. One of the sources underscored that private equity firms were unlikely to go hostile on Gardner Denver, adding that they would wait for an invitation before surfacing with interest.

TPG, Advent International and Onex Partners were all reported to have been around the HSI process, in which parties vied for the entire unit as well as Sundyne and Milton Roy separate from Sullair. Questioned whether The Carlyle Group and BC Partners could look at Gardner Denver with the aim of combining it with HSI, two of the sources said it was improbable, noting that the financial sponsors have their hands full with the current deal, which is projected to close in 4Q12.

Gardner Denver and Atlas Copco were reported to have been looking at Sullair. While Sweden-based Atlas Copco would be a logical strategic buyer for Gardner Denver, each of the sources said antitrust issues would impede a deal.

In its letter to Gardner Denver, ValueAct notes that the HSI deal reportedly approached 9x with debt financing of greater than 6x.

One of the sources said he did not believe Gardner Denver could be levered at the same level as HSI, estimating that the deal would require an equity check of about USD 1.8bn. This source ballparked that the equity check on the HSI deal was just over USD 1bn.

Another of the sources said he did not believe Gardner Denver was worth the value implied by the amount of leverage that may be available if the unit were to be sold. He noted that the amount of leverage available for the HSI deal exceeded what sponsors ultimately used.

Compared to HSI, the first source said Gardner Denver is a lower margin business with less aftermarket exposure, emerging market presence and oil and gas. The second source described Sullair as a higher quality industrial business relative to Gardner Denver. While this could weigh on the leverage potential buyers would consider putting on Gardner Denver, another of the sources argued that the room for improvement allows the bidder pool flexibility that did not come with HSI.

Also likely to factor into a potential Gardner Denver sale is the amount of restructuring that needs to be done on the company’s European operations and the costs associated with the effort, said all of the industry sources.

One of the sources pointed in particular to the company’s 2008 acquisition of UK-based compressed air manufacturer and gas solutions company, CompAir, as requiring substantial restructuring. At the time of the deal, then-CEO Pennypacker said “with more than three-quarters of CompAir’s sales in Europe and Asia, this transaction extends the geographic availability of Gardner Denver’s products and significantly enhances our channels of distribution to serve the global market.”

On Thursday, Gardner Denver announced a restructuring initiative for its European Industrial Products Group that is expected to run through 2015. The company expects to record charges related to the plan in USD 85m to USD 100m range.

Gardner Denver is also contending with the cyclical weakness of its energy business. The company has two reportable segments: Industrial Products Group and Engineered Products Group. The company notes in SEC filings that the markets some of its engineered products tend to be very cyclical given the Engineered Products Group has historically corresponded to demand for petrochemical products and has been influenced by prices and inventory levels for oil and natural gas, rig count and other economic factors.

The company, which is incorporated in Delaware, has a shareholder rights plan in place as well as a staggered board structure. Three directors are up for reelection at the 2013 annual meeting, two of which are chairperson and former Cooper Industries (NYSE:CBE) General Counsel, Diane Schumacher, and Charles Szews, CEO of Oshkosh (NYSE:OSK) which is currently dealing with its own bout of activism from Carl Icahn. The 2012 AGM was held in May.

With analytics by Don Bilson

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