SPX Corp.’s Sale of Vehicle Repair Business Is Credit Positive

SPX Corp.’s Sale of Vehicle Repair Business Is Credit Positive

Last Tuesday, SPX Corp. (Ba1 negative) said it will sell its service solutions business, a provider of tools, equipment and diagnostic services for vehicle repairs, to Robert Bosch GmbH (unrated) of Germany for $1.15 billion in cash. The credit positive divestiture will enable SPX to reduce debt and increase cash.

The sale follows SPX’s debt-funded acquisition of CLYDEUNION Pumps for $1.1 billion, including potential earn-out payments, in December. Both transactions reflect a strategic shift at SPX toward the flow control business, which has good long-term prospects for supplying infrastructure equipment in China, India and other emerging markets. Flow control components like pumps, valves and filters are used in water treatment, gas delivery and other industrial applications involving liquids. Following the sale to Bosch, flow control will account for about 53% of SPX’s revenue, compared with 43% (pro forma for the CLYDEUNION acquisition) in 2011. The company had total revenue of $5.3 billion for the 12 months ended 1 October 2011.
SPX said it plans to reduce debt by about $350 million and fund its 2013 debt maturities. The deal will also increase liquidity. On a pro forma basis, SPX expects its cash balance to rise to about $940 million from $537 million at the end of third-quarter 2011 as a result of the deal. SPX expects to record a gain on the sale of about $450 million upon closing, which it expects will occur in the first half of 2012.

Nevertheless, SPX is selling a business that accounts for $60-$70 million of free cash flow, or about one-third of the company’s annual total, and it plans to pursue a share repurchase of at least $350 million. Furthermore, although we expect that SPX will use proceeds of the Bosch deal to reduce leverage in 2012 to 1.5x-2.5x, on an as-reported basis, from about 3.0x, this improvement may only be temporary given the company’s focus on growth through acquisitions.