On April 15th, the global cable market woke up to striking news as Prysmian Group, a world leader in cable manufacturing, energy solutions, and telecom cables, announced its acquisition of Encore Wire. The Italian leading player, headquartered in Milan, will expand its operations in North America with its decision to acquire the American industrial company. The move signifies a strategic step by Prysmian to leverage Encore Wire’s expertise and products to enhance its vertical integration strategy. For Encore Wire, a leading player in the wire and cable manufacturing industry, this acquisition could provide the firm with access to Prysmian’s global network and resources for further growth opportunities.
About Prysmian [BIT:PRY]
Prysmian stands as an international leader in cabling solutions, driving the digital evolution and energy transition. With a vast geographic presence, a legacy of technological innovation and expertise, and a diverse product portfolio, the firm is eager to seize opportunities in burgeoning markets. Strongly aligned with significant market trends, Prysmian is keen to develop resilient, innovative and sustainable cable solutions across Power Grid, Transmission, Electrification and Digital segments. With nearly 150 years of industry experience, the firm possesses a workforce of approximately 30,000 employees, 108 manufacturing facilities, 26 R&D centres across more than 50 countries, and most recently achieved sales exceeding €15Bn.
Prysmian stands as an international leader in cabling solutions, driving the digital evolution and energy transition. With a vast geographic presence, a legacy of technological innovation and expertise, and a diverse product portfolio, the firm is eager to seize opportunities in burgeoning markets. Strongly aligned with significant market trends, Prysmian is keen to develop resilient, innovative and sustainable cable solutions across Power Grid, Transmission, Electrification and Digital segments. With nearly 150 years of industry experience, the firm possesses a workforce of approximately 30,000 employees, 108 manufacturing facilities, 26 R&D centres across more than 50 countries, and most recently achieved sales exceeding €15Bn.
About Encore Wire [NASDAQ:WIRE]
Encore Wire offers broad range of copper and aluminum electrical wire and cables, supplying power generation and distribution solutions to meet its customers' needs today and in the future. The Company focuses on maintaining a low-cost of production while providing exceptional customer service, quickly shipping complete orders coast-to-coast. Its products are made in America at its vertically-integrated, single-site, Texas campus.
The principal raw materials used by Encore in manufacturing its products are copper cathode, copper scrap, PVC thermoplastic compounds, XLPE compounds, aluminum, steel, paper and nylon, all of which are readily available from a number of suppliers. Copper is the principal raw material used by the Company in manufacturing its products, constituting 78.6% of the dollar value of all raw materials used by the Company during 2022. Copper requirements for manufacturing our wire are purchased primarily from miners and commodity brokers at prices determined each month primarily based on the average daily COMEX closing prices for copper for that month, plus a negotiated premium.
Encore Wire offers broad range of copper and aluminum electrical wire and cables, supplying power generation and distribution solutions to meet its customers' needs today and in the future. The Company focuses on maintaining a low-cost of production while providing exceptional customer service, quickly shipping complete orders coast-to-coast. Its products are made in America at its vertically-integrated, single-site, Texas campus.
The principal raw materials used by Encore in manufacturing its products are copper cathode, copper scrap, PVC thermoplastic compounds, XLPE compounds, aluminum, steel, paper and nylon, all of which are readily available from a number of suppliers. Copper is the principal raw material used by the Company in manufacturing its products, constituting 78.6% of the dollar value of all raw materials used by the Company during 2022. Copper requirements for manufacturing our wire are purchased primarily from miners and commodity brokers at prices determined each month primarily based on the average daily COMEX closing prices for copper for that month, plus a negotiated premium.
Prysmian's Financials
When looking at the key highlights of the firm’s 2023 financial reports, the CEO was keen to boast about their “outstanding results”, “strong cash generation” and “reinforced commitment on climate change”. In 2023 the firm saw an adjusted EBITDA of €1,628Mn (with a 10.6% EBITDA Margin) and a Group Net profit of €529Mn. Moreover, the firm’s net debt for 2023 was €1,188Mn. The firm’s commitment to maximising shareholder value was evident given its ROCE of 23.1% and dividend proposal of 0.7 euros/share (16.7% growth YoY). With respect to financing, the firm’s Debt-to-Equity currently sits at 81.88%. Interestingly, the firm is committed to allocating 10% of its capital allocation strategy to deleveraging. The company's financial flexibility has facilitated the acquisition of Encore Wire's solely through debt financing.
When looking at the key highlights of the firm’s 2023 financial reports, the CEO was keen to boast about their “outstanding results”, “strong cash generation” and “reinforced commitment on climate change”. In 2023 the firm saw an adjusted EBITDA of €1,628Mn (with a 10.6% EBITDA Margin) and a Group Net profit of €529Mn. Moreover, the firm’s net debt for 2023 was €1,188Mn. The firm’s commitment to maximising shareholder value was evident given its ROCE of 23.1% and dividend proposal of 0.7 euros/share (16.7% growth YoY). With respect to financing, the firm’s Debt-to-Equity currently sits at 81.88%. Interestingly, the firm is committed to allocating 10% of its capital allocation strategy to deleveraging. The company's financial flexibility has facilitated the acquisition of Encore Wire's solely through debt financing.
Encore Wire's Financials
When looking at Encore Wire the firm’s Debt-to-Equity ratio stands at 12.9% (considerably lower than that of Prysmian). In the fiscal year 2023, Encore Wire achieved revenue totaling around $2.6Bn, accompanied by an EBITDA of $517Mn as well as 20% EBITDA margin, a FY23 EPS diluted of $21.62 and ~70% Cash conversion. Moreover, the firm’s Net Debt for 2023 was at $(560.6) Mn – hinting at the fact that Encore Wire relies heavily on cash.
Encore Wire's consistent profitability through various economic cycles, its high returns on invested capital, low capital intensity, and strong pricing power make it an excellent target in the field and the region. The company is lauded for its prudent capital allocation strategy, notably its share repurchase program, which has historically benefited shareholders. Encore Wire has no long-term debt on its books, and its revolving line of credit remains untouched. As of December 31, 2023, the company held $560.6 Mn in cash. In the quarter, Encore Wire repurchased 476,300 shares of its common stock, expending $85.1 million in cash. Since the first quarter of 2020, the company has bought back 5,634,069 shares of its common stock, approximately 27% of outstanding shares, for a total cash outlay of $771.7 Mn. Additionally, Encore Wire declared a $0.02 cash dividend during the fourth quarter.
The exposure of Encore Wire’s to the copper prices has enabled the achievement of Net sales for the twelve months ended in December 31, 2022 were $3.018Bn compared to $2.593Bn during the same period in 2021 and $1.277 Bn during the same period in 2020. The 16.4% increase in net sales dollars in 2022 versus 2021 was primarily the result of a 7.4% increase in copper wire sales, driven by a 7.9% increase in copper wire pounds shipped, partially offset by a 0.5% decrease in the average selling price of copper wire due to moderate decreases in copper commodity prices in the trailing six months of 2022. In the twelve months ended December 31, 2021 versus the twelve months ended December 31, 2020, the 103.0% increase in net sales dollars was primarily the result of a 104.7% increase in copper wire sales. Sales dollars were driven higher by an 84.7% increase in average selling price of copper wire, coupled with a 10.8% increase in copper wire pounds shipped. Average selling prices for wire sold were driven higher by rising copper commodity prices.
Price competition for copper electrical wire and cable is significant, and the Company sells its products in accordance with prevailing market prices. Wire and cable prices can, and frequently do, change on a daily basis. This competitive pricing market for wire does not always mirror changes in copper prices, making margins highly volatile. In this regard the price of copper allowed the EBITDA margin to rise from c.a. 7% in 2019 to c.a. 28% in 2021 – the company now expects the value to normalize in the coming years.
When looking at Encore Wire the firm’s Debt-to-Equity ratio stands at 12.9% (considerably lower than that of Prysmian). In the fiscal year 2023, Encore Wire achieved revenue totaling around $2.6Bn, accompanied by an EBITDA of $517Mn as well as 20% EBITDA margin, a FY23 EPS diluted of $21.62 and ~70% Cash conversion. Moreover, the firm’s Net Debt for 2023 was at $(560.6) Mn – hinting at the fact that Encore Wire relies heavily on cash.
Encore Wire's consistent profitability through various economic cycles, its high returns on invested capital, low capital intensity, and strong pricing power make it an excellent target in the field and the region. The company is lauded for its prudent capital allocation strategy, notably its share repurchase program, which has historically benefited shareholders. Encore Wire has no long-term debt on its books, and its revolving line of credit remains untouched. As of December 31, 2023, the company held $560.6 Mn in cash. In the quarter, Encore Wire repurchased 476,300 shares of its common stock, expending $85.1 million in cash. Since the first quarter of 2020, the company has bought back 5,634,069 shares of its common stock, approximately 27% of outstanding shares, for a total cash outlay of $771.7 Mn. Additionally, Encore Wire declared a $0.02 cash dividend during the fourth quarter.
The exposure of Encore Wire’s to the copper prices has enabled the achievement of Net sales for the twelve months ended in December 31, 2022 were $3.018Bn compared to $2.593Bn during the same period in 2021 and $1.277 Bn during the same period in 2020. The 16.4% increase in net sales dollars in 2022 versus 2021 was primarily the result of a 7.4% increase in copper wire sales, driven by a 7.9% increase in copper wire pounds shipped, partially offset by a 0.5% decrease in the average selling price of copper wire due to moderate decreases in copper commodity prices in the trailing six months of 2022. In the twelve months ended December 31, 2021 versus the twelve months ended December 31, 2020, the 103.0% increase in net sales dollars was primarily the result of a 104.7% increase in copper wire sales. Sales dollars were driven higher by an 84.7% increase in average selling price of copper wire, coupled with a 10.8% increase in copper wire pounds shipped. Average selling prices for wire sold were driven higher by rising copper commodity prices.
Price competition for copper electrical wire and cable is significant, and the Company sells its products in accordance with prevailing market prices. Wire and cable prices can, and frequently do, change on a daily basis. This competitive pricing market for wire does not always mirror changes in copper prices, making margins highly volatile. In this regard the price of copper allowed the EBITDA margin to rise from c.a. 7% in 2019 to c.a. 28% in 2021 – the company now expects the value to normalize in the coming years.
Deal Rationale
Diving into the reasoning behind the deal, Prysmian’s management has been showing serious M&A intentions in the last 6-12 months. In particular, the firm’s designated CEO Massimo Battaini, weeks before the deal was announced, told media outlets that the acquisitions that the firm had “in mind are skewed towards building commercial synergies, which means increasing portfolio products in some geographies, increasing our market share or chasing new markets.” The executive even stated that North America is their “number one destination”. Battaini has shown preference across the pond as he favours America given that it’s “a consolidated marketplace”, whereas he sees Europe as “fragmented”. North America’s wire and cable market has a market value of $33.7Bn (2023) with a CAGR of 5.8% between 2024 and 2032. Hence, expansion into this market is likely to allow the firm to access a wider pool of consumers. This was the circumstance during the Italian firm's prior involvement in North America. In 2018, the Group acquired General Cable in a $3Bn deal. The firm’s CEO pointed out afterwards that the move enabled an “increase in the customer base”. Moreover, the deal also provided the firm with an improved “manufacturing footprint, shared IT systems, and “innovation know how”.
When looking specifically at Encore Wire as a potential acquisition target for Prysmian, the firm’s diversified product portfolio (copper and aluminium electrical wire and cables, power generation suppliance, distribution solutions) and low cost of production position could aid Prysmian in its ambition to transition itself into a more sustainable and reliable energy infrastructure. Moreover, the strategic rationale behind the deal is significant.
With this acquisition, Prysmian looks to:
The main element that has led to the consideration of this acquisition is the outstanding opportunity for Prysmian to become more relevant in the American market. The complementary product portfolio between Prysmian and Encore Wire combined with the highly verticalized operations of Encore in terms of upstream activity and downstream service level makes the acquisition highly synergistic. Post-deal Prysmian will have emerged as a top- tier operator with increased exposure to North America which is a highly profitable and increasingly demanding market in Prysmian’s footprint. The single site and the vertical integration make the operation very efficient and well suited to serve the market in the best possible way. The acquisition enables complementary product portfolio, and highly verticalized operations (upstream and downstream.) Prysmian’s growth strategy aims at acquisitions that are skewed towards building commercial synergies, which means increasing portfolio products in some geographies, increasing market share or chasing new markets, positioning it well in this transaction.
The deal is expected to be highly synergistic in nature, expecting to generate ~€140Mn run-rate pre-tax EBITDA synergies within 4 years from Closing with 40% operational synergy (organizational efficiency achieved by merging few organizations) and 60% commercial synergy (sales synergies i.e., selling through their channels, additional products, etc.). Most of the synergies are intended to be represented by manufacturing synergies as well as service and distribution operations. The deal is expected to achieve more than 70% of those synergies within year 2. Based on Battaini’s comments on the deal, the vast majority of commercial cross-selling opportunities, ~€100Mn, are expected to be realized in the next two years. The remaining ~€40Mn is related to operational manufacturing activities that will be achieved in the last two years. Moreover, the deal is expected to help deleverage Prysmian’s balance sheet. Based on pro forma aggregated results for the 12 months ended December 2023, the combined group would have posted net sales of over €17.7Bn and adjusted EBITDA of approximately €2.1Bn.
Diving into the reasoning behind the deal, Prysmian’s management has been showing serious M&A intentions in the last 6-12 months. In particular, the firm’s designated CEO Massimo Battaini, weeks before the deal was announced, told media outlets that the acquisitions that the firm had “in mind are skewed towards building commercial synergies, which means increasing portfolio products in some geographies, increasing our market share or chasing new markets.” The executive even stated that North America is their “number one destination”. Battaini has shown preference across the pond as he favours America given that it’s “a consolidated marketplace”, whereas he sees Europe as “fragmented”. North America’s wire and cable market has a market value of $33.7Bn (2023) with a CAGR of 5.8% between 2024 and 2032. Hence, expansion into this market is likely to allow the firm to access a wider pool of consumers. This was the circumstance during the Italian firm's prior involvement in North America. In 2018, the Group acquired General Cable in a $3Bn deal. The firm’s CEO pointed out afterwards that the move enabled an “increase in the customer base”. Moreover, the deal also provided the firm with an improved “manufacturing footprint, shared IT systems, and “innovation know how”.
When looking specifically at Encore Wire as a potential acquisition target for Prysmian, the firm’s diversified product portfolio (copper and aluminium electrical wire and cables, power generation suppliance, distribution solutions) and low cost of production position could aid Prysmian in its ambition to transition itself into a more sustainable and reliable energy infrastructure. Moreover, the strategic rationale behind the deal is significant.
With this acquisition, Prysmian looks to:
- Boost its engagement with secular growth factors
- Strengthen its presence in North America
- Utilise Encore Wire’s operational efficiency and high-quality service throughout Prysmian’s range of products
- Expand Prysmian’s product line-up to better meet customer demands in North America
The main element that has led to the consideration of this acquisition is the outstanding opportunity for Prysmian to become more relevant in the American market. The complementary product portfolio between Prysmian and Encore Wire combined with the highly verticalized operations of Encore in terms of upstream activity and downstream service level makes the acquisition highly synergistic. Post-deal Prysmian will have emerged as a top- tier operator with increased exposure to North America which is a highly profitable and increasingly demanding market in Prysmian’s footprint. The single site and the vertical integration make the operation very efficient and well suited to serve the market in the best possible way. The acquisition enables complementary product portfolio, and highly verticalized operations (upstream and downstream.) Prysmian’s growth strategy aims at acquisitions that are skewed towards building commercial synergies, which means increasing portfolio products in some geographies, increasing market share or chasing new markets, positioning it well in this transaction.
The deal is expected to be highly synergistic in nature, expecting to generate ~€140Mn run-rate pre-tax EBITDA synergies within 4 years from Closing with 40% operational synergy (organizational efficiency achieved by merging few organizations) and 60% commercial synergy (sales synergies i.e., selling through their channels, additional products, etc.). Most of the synergies are intended to be represented by manufacturing synergies as well as service and distribution operations. The deal is expected to achieve more than 70% of those synergies within year 2. Based on Battaini’s comments on the deal, the vast majority of commercial cross-selling opportunities, ~€100Mn, are expected to be realized in the next two years. The remaining ~€40Mn is related to operational manufacturing activities that will be achieved in the last two years. Moreover, the deal is expected to help deleverage Prysmian’s balance sheet. Based on pro forma aggregated results for the 12 months ended December 2023, the combined group would have posted net sales of over €17.7Bn and adjusted EBITDA of approximately €2.1Bn.
Recent M&A Activity in the industry
The widespread M&A activity within the industry is likely driven by each company's strong desire to gain a competitive advantage over competitors in order to cater market demands. According to industry experts, the competitive environment in this market is expected to get worse as technological innovations, product extensions as well as other strategies are adopted by more key vendors. To understand the implications of the deal, it is important to provide an industry analysis of the wire and cable market. The top companies operating in this industry include Nexans S.A., Prysmian Group, Furukawa Electric Co, Ltd, Leoni AG and NKT Cables. These firms have employed various strategies, such as product launch, acquisition, expansion and agreement in order to expand their foothold in the global industry. The industry has seen much M&A activity in recent years.
For example, Nexans completed the acquisition of Reka Cables in April 2023. This move was strongly aligned with Nexans’ mission to become a pure electrification player and contribute to carbon neutrality. Moreover, after successfully acquiring Centelsa in Colombia and Reka Cables in Finland, in February 2024, the Group announced an agreement to acquire La Triveneta Cavi in Italy, an iconic player in the European medium and low-voltage cable segments. This major step in the Group’s electrification strategy will add 700 people across four production units and over €800Mn in sales. The landmark transaction represents an acquisition multiple of 5.6x 2023 EBITDA pre-synergies and 4.6x post- synergies and will have a high-single-digit accretive impact on earnings per share (EPS) from year one.
The widespread M&A activity within the industry is likely driven by each company's strong desire to gain a competitive advantage over competitors in order to cater market demands. According to industry experts, the competitive environment in this market is expected to get worse as technological innovations, product extensions as well as other strategies are adopted by more key vendors. To understand the implications of the deal, it is important to provide an industry analysis of the wire and cable market. The top companies operating in this industry include Nexans S.A., Prysmian Group, Furukawa Electric Co, Ltd, Leoni AG and NKT Cables. These firms have employed various strategies, such as product launch, acquisition, expansion and agreement in order to expand their foothold in the global industry. The industry has seen much M&A activity in recent years.
For example, Nexans completed the acquisition of Reka Cables in April 2023. This move was strongly aligned with Nexans’ mission to become a pure electrification player and contribute to carbon neutrality. Moreover, after successfully acquiring Centelsa in Colombia and Reka Cables in Finland, in February 2024, the Group announced an agreement to acquire La Triveneta Cavi in Italy, an iconic player in the European medium and low-voltage cable segments. This major step in the Group’s electrification strategy will add 700 people across four production units and over €800Mn in sales. The landmark transaction represents an acquisition multiple of 5.6x 2023 EBITDA pre-synergies and 4.6x post- synergies and will have a high-single-digit accretive impact on earnings per share (EPS) from year one.
How will the "New" Prysmian look like?
The “new” Prysmian will have increased exposure to North America, thus enhancing geography and business footprint, they will get access to the industrial construction industry, a segment they are not as strong in and develop a balanced position across all business segments. North America is their number one destination as it’s a consolidated marketplace, while Europe is fragmented. The acquisition of Encore Wire also increases Prysmian’s exposure to secular growth drivers along with a unique opportunity to accelerate growth in the region. According to Battaini, Prysmian’s reorganization into four units — renewable transmission; power grid; electrification; and digital solutions — is aimed at tackling trends that accelerated during the pandemic. The slowdown in the telecoms space, especially in the US, comes as a result of massive demand in 2022, when companies stockpiled to counterbalance supply chain disruptions. The US telecoms sector is set to turn around in the second part of this year, when incentives to connect rural areas are released. Another driver is the very strong demand in North America, driving volume increase for Encore Wire, considering they have a significant amount of capacity they are better placed to capture the growth. North America will become more than 50% contributor to Prysmian’s EBITDA, due to the region’s highly profitable nature.
The “new” Prysmian will have increased exposure to North America, thus enhancing geography and business footprint, they will get access to the industrial construction industry, a segment they are not as strong in and develop a balanced position across all business segments. North America is their number one destination as it’s a consolidated marketplace, while Europe is fragmented. The acquisition of Encore Wire also increases Prysmian’s exposure to secular growth drivers along with a unique opportunity to accelerate growth in the region. According to Battaini, Prysmian’s reorganization into four units — renewable transmission; power grid; electrification; and digital solutions — is aimed at tackling trends that accelerated during the pandemic. The slowdown in the telecoms space, especially in the US, comes as a result of massive demand in 2022, when companies stockpiled to counterbalance supply chain disruptions. The US telecoms sector is set to turn around in the second part of this year, when incentives to connect rural areas are released. Another driver is the very strong demand in North America, driving volume increase for Encore Wire, considering they have a significant amount of capacity they are better placed to capture the growth. North America will become more than 50% contributor to Prysmian’s EBITDA, due to the region’s highly profitable nature.
Figure 1: Geographical Synergies after the Deal (EBITDA by Geo.) – source: Bloomberg Terminal
Encore Wire engages in internal production of compounds and copper rods, which is significant savings for Prysmian in terms of what they buy from the market. A large chunk of operational synergies is from accessing these assets. According to Battaini, there are some investments to make but they have a clear pathway to these synergies. There is also a possibility to consolidate some parts of Prysmian’s production to Encore’s one site operations. Furthermore, Encore has made substantial investments in the expansion of their cable capacity with an increase of cable capacity space by 20%-30%. They have additionally invested in vertical integration including upwards integration with compounding facility with plans to launch new compounding material for insulation this year. This production will come in Q3 in 2024. They have also invested in vertical integration, creating one large distribution center, making this efficient manufacturing machine capable of serving the market.
The acquisition is anticipated to elevate Prysmian to the status of a genuine global frontrunner in cable manufacturing, with the United States emerging as their foremost market. This strategic move enables Prysmian to provide a comprehensive array of cable products and services, further enriched by specialized knowledge in both copper and aluminum cables. This development aligns with Prysmian's broader vision to expand its market reach and solidify its position as an industry leader.
The acquisition is anticipated to elevate Prysmian to the status of a genuine global frontrunner in cable manufacturing, with the United States emerging as their foremost market. This strategic move enables Prysmian to provide a comprehensive array of cable products and services, further enriched by specialized knowledge in both copper and aluminum cables. This development aligns with Prysmian's broader vision to expand its market reach and solidify its position as an industry leader.
Advisors and Deal Closing
Advisors: Goldman Sachs Bank Europe SE, Succursale Italia is acting as sole financial advisor to Prysmian and Wachtell, Lipton, Rosen & Katz is acting as legal advisor. J.P. Morgan Securities. LLC is acting as sole financial advisor to Encore Wire and O’Melveny & Myers LLP is acting as legal advisor.
Deal type: the deal is a friendly takeover and the transaction, which has been unanimously approved by each company’s Board of Directors and recommended to its shareholders by Encore Wire’s Board of Directors, is expected to close in the second half of 2024, subject to approval of Encore Wire’s shareholders representing at least a majority of the outstanding shares, regulatory approvals, and other customary closing conditions. However, under the terms of the agreement, Encore may solicit alternative acquisition proposals from third parties during a 35-day “go-shop” period.
Deal type: the deal is a friendly takeover and the transaction, which has been unanimously approved by each company’s Board of Directors and recommended to its shareholders by Encore Wire’s Board of Directors, is expected to close in the second half of 2024, subject to approval of Encore Wire’s shareholders representing at least a majority of the outstanding shares, regulatory approvals, and other customary closing conditions. However, under the terms of the agreement, Encore may solicit alternative acquisition proposals from third parties during a 35-day “go-shop” period.
Our Valuation
As previously mentioned, Encore Wire has entered into a definitive merger agreement under which Prysmian will acquire Encore Wire for $290 per share in cash. Encore Wire’s implied EV is valued at $4.15Bn, with a multiple of 8.2x EV/2023A EBITDA and 6.3x EV/2023A EBITDA including run rate synergies. To deliver a proper and accurate valuation, we have decided to include both precedent transaction and trading comparable analysis, selecting a set of similar companies and deals in the Wires and Cables Industry.
Trading Comparable Analysis
Figure 2: Comparable Analysis – source: Bloomberg Terminal/FactSet
The selected companies operate in the same market segment as our Target: The Wires and Cables Industry. These companies operate in different regions: Belden Inc. And Atkore Inc. in the United States, Nexans SA in Europe and Sumitomo Electric Industries and LS Corp in Asia. Their activities encompass the design, manufacture and distribution of cable systems and services. We have estimated the last and the two-year forward EV/EBITDA multiples for the Wires and Cables Industry since it certainly represents the most valuable metrics for evaluating companies in the Industrial Sector. All the estimates are based on the analysts’ consensus and the financial statements on FactSet.
We computed then the EV/EBITDA Mean, Median, 25th and 75th Percentile for FY2023, FY2024E and FY2025E. Based on the Average EV/EBITDA, we assessed an Enterprise Value of $3,367Mn for Encore Wire, a very close figure to the Transaction Value of the Acquisition under consideration, with a premium of 23.24% respective to the official price paid ($4,150Mn). Overall, we can say that the company is paying a fair price for the target, and that it has remunerated the shareholders appropriately. Coherently with our valuation.
We computed then the EV/EBITDA Mean, Median, 25th and 75th Percentile for FY2023, FY2024E and FY2025E. Based on the Average EV/EBITDA, we assessed an Enterprise Value of $3,367Mn for Encore Wire, a very close figure to the Transaction Value of the Acquisition under consideration, with a premium of 23.24% respective to the official price paid ($4,150Mn). Overall, we can say that the company is paying a fair price for the target, and that it has remunerated the shareholders appropriately. Coherently with our valuation.
Past Transaction Analysis
Figure 3: Past Transactions Analysis – source: Bloomberg Terminal/FactSet
We have also chosen to include a Past Transactions Analysis in our evaluation to increase the level of accuracy in the research, having now two used two different estimation methods of Encore Wire’s Enterprise Value. In addition, the added value of this kind of Analysis revolves around the premium the buyer must pay when the deal encompasses the complete acquisition of the target, which is usually not considered in a Trading Comparable Analysis.
We have selected four past transactions where both Target and Buyer operate in the Wires and Cable industries. Three of them encompass complete acquisitions of the target company, while one regards the acquisition of a part of shares outstanding, which have led the acquirer to obtain a majority stake of the ownership. We have found that the Average EV/EBITDA is 8.6x for the FY23, which implies that our estimation of Encore Wire’s Enterprise Value is $ 4,136.6Mn
We have selected four past transactions where both Target and Buyer operate in the Wires and Cable industries. Three of them encompass complete acquisitions of the target company, while one regards the acquisition of a part of shares outstanding, which have led the acquirer to obtain a majority stake of the ownership. We have found that the Average EV/EBITDA is 8.6x for the FY23, which implies that our estimation of Encore Wire’s Enterprise Value is $ 4,136.6Mn
Accretion/Dilution
The transaction is expected to generate an EPS accretion of ~30% including run-rate synergies, an EPS accretion of ~20% pre-synergies for Prysmian shareholders. The acquisition is accretive because the post-deal EPS (€2.52) is greater than the pre-deal EPS (€1.94). As seen, the post-deal EPS (€2.52) shows that the deal is accretive, which can be attributed to revenue and cost synergies. Banca Akros estimates 15/13% EPS improvement (pre-synergies) and a 27/29% improvement including synergies – in line with our estimates. These numbers are a positive indication of the company’s financial performance post-deal and that the transaction has been beneficial to Prysmian’s shareholders.
Figure 4: EPS Accretion pre and run-rate synergies – source: Bloomberg
Effects on the Stock Prices
Encore Wire’s stock price experienced an increase of 11.6% after the announcement of a definitive agreement on the acquisition on April 15, climbing from $261 to $290.2 per share. It is also interesting to take into consideration the significant change in volumes in the days following the announcement of the deal. In fact, after an obvious massive climb of about 2,200% of the number of transactions on 15 April, there has been a constant decrease in this figure. Following the significant surge in the stock price, there has been a subsequent retracement, coupled with a consistent decrease in transaction volume. This trend could potentially suggest that the market is not accurately pricing the successful completion of the transaction, whether it is for concerns linked to antitrust issues impeding the acquisition or potential difficulties in closing the deal.
Encore Wire’s stock price experienced an increase of 11.6% after the announcement of a definitive agreement on the acquisition on April 15, climbing from $261 to $290.2 per share. It is also interesting to take into consideration the significant change in volumes in the days following the announcement of the deal. In fact, after an obvious massive climb of about 2,200% of the number of transactions on 15 April, there has been a constant decrease in this figure. Following the significant surge in the stock price, there has been a subsequent retracement, coupled with a consistent decrease in transaction volume. This trend could potentially suggest that the market is not accurately pricing the successful completion of the transaction, whether it is for concerns linked to antitrust issues impeding the acquisition or potential difficulties in closing the deal.
Conclusions
Prysmian Group’s decision is an important step towards improving the group’s vertical integration whilst expanding in the North American market with Encore Wire’s expertise. With its strong balance sheet and financial results, Prysmian is poised for a successful future, opening doors for extensive company growth if the right decisions are taken. Commercial synergies are on front stage for the company, by expanding in the Americas market, which will require a different strategy as Prysmian explores a more consolidated marketplace as compared to the fragmented European market. Historically Prysmian’s M&A activity contributed to its efficiency and optimization improvements, allowing the company to persevere and expand rapidly in an ever-growing cable industry. With Encore Wire’s acquisition, Prysmian can pursue some of the main company’s goals: transition to a sustainable and reliable energy infrastructure, given the target’s diversified portfolio and low-cost strategy. Overall, Prysmian Group’s expertise within the industry alongside Encore Wire’s regional expertise will be pivotal to the Group’s expansion success in North America and the company’s growth.
Prysmian Group’s decision is an important step towards improving the group’s vertical integration whilst expanding in the North American market with Encore Wire’s expertise. With its strong balance sheet and financial results, Prysmian is poised for a successful future, opening doors for extensive company growth if the right decisions are taken. Commercial synergies are on front stage for the company, by expanding in the Americas market, which will require a different strategy as Prysmian explores a more consolidated marketplace as compared to the fragmented European market. Historically Prysmian’s M&A activity contributed to its efficiency and optimization improvements, allowing the company to persevere and expand rapidly in an ever-growing cable industry. With Encore Wire’s acquisition, Prysmian can pursue some of the main company’s goals: transition to a sustainable and reliable energy infrastructure, given the target’s diversified portfolio and low-cost strategy. Overall, Prysmian Group’s expertise within the industry alongside Encore Wire’s regional expertise will be pivotal to the Group’s expansion success in North America and the company’s growth.
Sources:
- Bloomberg Terminal
- FactSet
- Reuters
- Prysmian’s Investor statement
- Encore Wire’s Investor statement
- Encore Wire’s 10K Filings (FactSet)
Written by: Gauri Gupta, Vasara Silininkaite, Boaz Lister, Lorenzo Monteduro