3M Co. (MMM:US), the manufacturer whose new chief executive officer has said he’s considering larger deals, agreed to buy Ceradyne Inc. (CRDN:US) for $860 million to expand into ceramics used in energy, aerospace and defense industries.
3M agreed to pay $35 a share and plans to complete the transaction by the end of the year, according to a statement today. The board of Costa Mesa, California-based Ceradyne has recommended shareholders accept the offer, which is 43 percent higher than the closing price on Sept. 28.
The purchase, the biggest announced by St. Paul, Minnesota- based 3M this year, will help the company expand into ceramics as the material becomes more popular across several industries. Ceramics are more frequently used because they are more heat- resistant and harder than metal, said Nick Heymann, an analyst with William Blair & Co. in New York.
“For 3M, this is basically a way to participate in one of the highest growth materials segment across the broadest swath of industries,” said Heymann, who rates the shares market perform. “You’re buying a high value-added supplier of unique technology in an above-average growth market, so you’re going to pay up for that.”
3M agreed to pay about 6 times Ceradyne’s earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That’s close to the 5.3 ratio of similar deals.
Ceradyne rose 43 percent to $34.97 at the close of trading in New York. The stock had declined 8.8 percent through Sept. 28. 3M rose 0.9 percent to $93.29.
3M CEO Inge Thulin, who succeeded George Buckley in February, said in a Sept. 19 presentation that the company’s deals pipeline looked good and acquisitions would potentially be “more sizable” than in the past.
The company, the maker of Post-it Notes, is still fighting to keep alive an agreement to buy the office-products unit of Avery Dennison Corp. (AVY:US) for $550 million announced in January. The Department of Justice said last month it would move to block the deal. 3M and Avery have said they would try to work with the department to gain regulatory approval.
3M needs acquisitions to spur growth amid weak European markets and China’s slowdown, Heymann said.
“It underscores the fact that the organic-growth environment for them right now is simply not ultra-strong,” he said. “They are prudently trying to supplement that weaker environment.”
The Ceradyne acquisition will reduce earnings by about 5 cents a share in the first year. Excluding integration costs and accounting adjustments, the deal will add about 1 cent a share in the same period, 3M said. The acquisition is valued at $670 million including cash and debt, 3M said in the statement.
Ceradyne has diversified its ceramic materials customers away from defense, which accounted for 39 percent of sales in 2011, down from 74 percent of sales in 2007, according to a company presentation on its website.
During the same period, sales to the energy industry jumped to 23 percent from 3 percent, and industrial sales rose to 29 percent from 17 percent. The company makes products ranging from thrust bearings for the oil and gas industries to military helmets.
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