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3M Inks Second-Biggest Deal in $2 Billion Scott Safety Purchase

16 March 2017

By Rick Clough, Bloomberg

3M Co. agreed to buy Scott Safety from Johnson Controls International Plc in a $2 billion deal, forging another large purchase to bolster one of its central businesses.

The acquisition will add respiratory-protection products, thermal-imaging devices and other products for firefighters and industrial workers to 3M’s safety division, the company said Thursday in a statement. The move comes less than two years after 3M bought a safety business from KKR & Co. for $2.5 billion.

“This is a logical acquisition for 3M and the inclusion of Scott Safety’s fire and safety products should complement its safety and graphics portfolio,” Nicholas Heymann, an analyst at William Blair & Co., said in a note. Still, the deal is “not an inexpensive way to supplement 3M’s organic growth.”

3M, which makes products from gas masks to Post-it notes, is boosting the size of acquisitions to reshape its portfolio amid sluggish growth and pressures in its consumer and electronics units in particular. The St. Paul, Minnesota-based company, which generates about two-thirds of its sales abroad, has sought to reduce U.S. expenses and strengthen its business in Europe and Latin America.

The deal is the second-largest in 3M’s 115-year history, following the purchase of Capital Safety from KKR. At an industry conference this week, 3M Chief Financial Officer Nick Gangestad said the company is more open to large acquisitions than it was in the past.

Chief Executive Officer Inge Thulin said last year that the company may spend more than $10 billion on acquisitions through 2020.

Narrowed Focus

For Johnson Controls, the deal is “consistent with our priority to focus the portfolio on our two core platforms of buildings and energy,” CEO Alex Molinaroli said in a separate release. The Cork, Ireland-based company, which is reviewing operations following last year’s merger with Tyco International, expects the plan will increase per-share earnings by 12 percent to 15 percent a year by 2020.

Scott Safety “represents a non-core asset as JCI continues to prune its portfolio post-merger and move towards being highly levered to the commercial-buildings end market,” Credit Suisse Group AG analyst Julian Mitchell said in a note. The $1.8 billion to $1.9 billion in net proceeds will be used to pay down a portion of the debt related to the Tyco merger, he said.

3M fell less than 1 percent to $190 at 11:10 a.m. in New York. Johnson Controls was little changed at $41.92.

Reshaping Business

3M has reshaped its operations with a series of deals in recent years, including the acquisition last year of Semfinder, a medical coding technology company, and the $1 billion purchase of Polypore International Inc.’s filtration business in 2015. 3M has trimmed divisions as well, including its identity-management and safety prescription-eyewear operations.

Safety and graphics is 3M’s second-largest business unit, with $5.7 billion in sales in 2016. Scott Safety, based in Monroe, North Carolina, reported revenue of about $570 million last year and employs about 1,500 people.

3M expects the purchase to add 10 cents a share to adjusted earnings in the first 12 months, though it will reduce earnings by 10 cents under generally accepted accounting principles.

The deal is expected to close in the second half. Citigroup Inc. and Goldman Sachs Group Inc. were financial advisers to 3M, while Cleary Gottlieb Steen & Hamilton provided legal counsel. Johnson Controls engaged Centerview Partners for financial advice and Simpson Thacher & Bartlett and Axinn, Veltrop & Harkrider as legal counsel.

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