Apollo Set to Acquire Rexnord

Rexnord Corp. (USA) is set to be acquired by Apollo Management LP, as Carlyle Group follows through on its stated plan to divest the diversified manufacturer. Unusually for this type of transaction, Apollo is a private equity investment company, along the lines of, but smaller than, Carlyle Group. Because Carlyle acquired Rexnord with the objective of improving its operations as far as cost-effectiveness and financial engineering allowed, the normal exit strategy for Carlyle would have been to cash out to the public equity market by taking Rexnord public. Alternatively, the company might be sold for a handsome profit to another diversified manufacturer or the management team itself. Rexnord's results would seem to prove the worth of Carlyle's investment. The company recently reported fiscal 2006 sales of $1.1 billion, returning $22.9 million in net income. However, it does carry a staggering $754 million debt load. In recent months, many analysts argue that the public equity markets' appetite for highly leveraged turnaround plays such as Rexnord may be not only shrinking but also open to far more scrutiny and potentially lesser valuations than in the recent past. Essentially, it is possible that taking a rejuvenated but debt-laden company public may not be worth the substantial cost and effort. The market's lack of appetite for such deals may explain why Carlyle pulled back from its planned IPO for Rexnord. The company had followed through with the necessary registration with the U.S. Securities and Exchange Commission for a Rexnord IPO but it has since been withdrawn. Acquisition by Apollo also hints that Rexnord may still have significant unlocked potential for improvement and higher valuation. Private equity companies simply do not buy businesses that do not have that potential; their acquisitions are made with the intent of improving operations, use their access to less expensive debt, ride the rising leveraged valuation and sell at a significant profit. Carlyle's handling of Rexnord is one example. In late 2002, Carlyle acquired Rexnord from cash-strapped Invensys plc (UK) for just USD $925 million in a highly leveraged deal. Of that $925 million, just $340 million was cash and $585 million was debt. Carlyle later added Falk Corp. to Rexnord for $301 million in debt financing. Now, just four years and operating improvements later, Apollo will pay Carlyle $1.825 billion for the privilege of owning Rexnord. In addition, Rexnord has filed a cash tender offer for the $225 million of its debt that is still publicly traded. The future of Rexnord's extensive bearing manufacturing operations under Apollo are unknown. When Carlyle acquired Rexnord from Invensys, a Carlyle spokesman assured that, "Rexnord's bearing operations are an integral part of the company and a critical component to providing power transmission products to the industries served by Rexnord. We view these as premium brands that we expect to grow in the future." Rexnord is a diversified manufacturing operation, serving a wide variety of markets. The company was created by the 1970 merger of Rex Chainbelt and Nordberg Manufacturing. Its bearing manufacturing operations are well-known established brands: Link-Belt Bearing Division, headquartered in Indianapolis, Indiana, manufactures a wide range of automotive and industrial bearings, inserts and mounted units. A second manufacturing location in Clinton, Tennessee produces cylindrical roller bearings. Link-Belt is best known for its industrial bearing inserts and mounted units, including pillow blocks, flange units, plummer blocks and all-stainless units. Link-Belt offers not only ball bearings and cylindrical roller bearings, but also sleeve bearings in babbitt, bronze and cast iron. Rex Bearing, in Downers Grove, Illinois, manufactures three product lines -- Rex mounted roller bearings, Shafer aerospace bearings, and Duralon / Turflite filament bearings. Rex and Shafer bearings are mounted roller bearings, pillow blocks, flange blocks and take-up units which allow for a wide degree of shaft misalignment within the bearing itself. The filament bearings are made of Teflon and carbon fiber. MB Bearings is located in Valparaiso, Indiana. Acquired by Rexnord in 1998, MB manufactures standard and custom precision mounted bearings and inserts -- pillow blocks, flange units, take-up units, flange brackets and hanger units. W.M. Berg, Inc. is located in Rockaway, New York. Berg specializes in manufacturing and distributing miniature precision mechanical components. The Berg miniature bearing line includes ball, roller, needle, nonmetallic, sintered, spherical, thrust and oilless. Sizes range from 3/64" to 1/2".