| 2019 | 2020 | ||||||
| Price: | 288.00 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 27 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 1,046 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 358 | EBIT | 0 | 0 | |||
| TEV (in $M): | 1,404 | TEV/EBIT | 0 | 0 | |||
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Nilfisk Holdings (NLFSK DC) is a Denmark-based company that makes cleaning equipment. NLFSK is an attractive stand-alone story as a recent spin-off with room to expand margins. Additionally there is a possibility that NLFSK may merge, acquire or be acquired by its main US competitor Tennant (TNC), which would generate significant synergies and good upside for the stock. This is not a new idea but the timing is now better than it was in the past.
Full disclosure: While Nilfisk has a $1.2b USD market cap, the ADV is only around $1m and averages can be deceiving. Liquidity is not a luxury here. In addition, Nilfisk is not a traditionally “cheap” stock by VIC standards and the real appeal is spec upside from a potential deal. If you stop reading here, no offense taken.
For those that have continued on, Nilfisk makes those zamboni-like machines that you may have seen roaming the aisles of your local supermarket or the hallways of a high school or hospital. It’s generally an appealing business given three main players, rational competition, low organic growth and respectable margins. The future growth driver is autonomous cleaning machines that sell for 5-6x the price of a normal machine and offer customers a way to manage rising labor costs. See link below. Nilfisk is targeting autonomous at 10% of revs in the next 4-5 years and Walmart just recently announced it was rolling out such machines across most of its US stores.
For further background on the industry, yarak775 posted a good short pitch on TNC in August 2018 that I recommend reading. In addition, two local brokers (Danske and ABG) cover the company and published initiation reports around the time of the spin. I’ll skip that for now and focus on the recent history and why I think a deal could be likely.
Nilfisk was spun-off from NKT DC (a high voltage cable business) in October 2017. The typical spin-like arguments applied - Nilfisk wasnʼt given the appropriate attention and, under new management, it should be able to accelerate growth and raise margins.
Shortly after the spin (in December 2017), a fund called Primestone put out a very lengthy presentation urging Nilfisk and Tennant to merge. Primestone took a 5% stake in both TNC and NLFSK. A link to their presentation can be found at the link below.
https://www.sec.gov/Archives/edgar/data/97134/000090266417004554/p17-2334exhibit_1.htm
The logic for the argument seemed sound. Namely, Tennant is strong in the US (where Nilfisk struggles) and Nilfisk is strong in Europe (where Tennant struggles). Nilfisk is stronger in indirect channels; Tennant is strong in direct channels. The list goes on. In summary, there are 3 main players all with ~12% share (Tennant, Nilfisk, and Kärcher). The rest of the market is heavily fragmented. A Nilfisk/Tennant combo would create a clear market leader with significantly improved margins given the benefits of scale. In addition, Primestone made the bold claim that a merger would “generate EPS accretion in excess of 85% for both companies.”
What followed was fascinating. Nilfisk basically said “we agree!” on multiple occasions. Analysts and industry observers echoed similar thoughts. For instance, this was from Nilfiskʼs March 2018 AGM: “As we said earlier, we believe that the two companies complement each other very well. We believe that there is a lot of value in combining the strengths of the two companies. For us, these thoughts are not new, this has been our assessment over the past 10 years. In this fragmented industry, it makes sense.” Nilfisk’s stock ran up 20% to around 360 DK.
Tennant, on the other hand, was oddly quick to squash the idea. During their Q4 call in February 2018, Tennant said that “after thoroughly evaluating the potential merger that was suggested by Primestone....(we) concluded that continuing to execute the companyʼs business plan represents the best path forward.” The reason why wasn’t exactly clear but timing was noted as TNC had just recently completed an acquisition of a company called IPC that it still needed to integrate. While the two companies are nearly identical in size (in terms of revenue, EBITDA, etc), Nilfisk had a slightly higher trading multiple at the time and, as a result, Primestoneʼs presentation suggested a share conversion that would have resulted in Nilfisk shareholders owning 54% of the combined entity. This was probably off-putting to TNC.
For their part, Nilfisk still didnʼt give up on the idea. In fact, it wasn’t until their Q2 call in August 2018 (6 months after TNC publicly killed the proposal) that NLFSK management stated there is “more value in our stand-alone plan.”
Interestingly though, Nilfisk refused to comment on whether that was because they no longer believed in the potential synergies or if it was simply because Tennant wouldnʼt cooperate. My strong belief is that it was the latter. As the Nilfisk chairman said in the press, “it takes two to tango.”
Following this, everyone assumed the merger talks were dead and these would go back to being sleepy little cleaning businesses. And by “everyone”, I mean the 3 analysts that follow NLFSK and the 2.5 that cover TNC.
Meanwhile, Nilfisk ran into some operational hiccups in 2Hʼ18 and the stock traded down to around 240 DK (33% below the takeout spec highs and ~20% below where it spun in late 2017 at 300 DK). The current stock price of 287 DK is only marginally off these lows. While the stand-alone targets imply attractive growth, local investors seem to be taking a “wait and see” approach as Nilfisk deals with tariffs and other transitory headwinds.
Where this gets really interesting is that Primestone re-emerged several months ago (in November 2018) and increased its stake in Nilfisk from 5% to 16%. Around this same time, the Lego family trust also took at a 16% stake, which it more recently increased to 20%. A few articles in the local press followed that (when translated to English) essentially say “a merger could be back on.” See link below. Whatʼs also interesting about this is that Primestone did nothing with its TNC position but took NLFSK from a moderately-sized stake to a whopping 25% of its fund (based on its disclosed assets from regulatory filings).
Over the past few months there have been several additional developments that suggest to me that there may be renewed interest in exploring a combination:
Tennant has continued to struggle in Europe and Nilfisk has had renewed issues in the US (potentially reinforcing the logic of a combination). In addition, Tennantʼs stock has outperformed Nilfisk, suggesting TNC would own a greater slice of New Co today.
TNC’s integration of IPC is now close to complete. In addition, if you speak with Tennant, they will tell you that they never intended to give the impression that Primestone’s proposal was a bad idea but rather that the timing (in December 2017) just wasn’t ideal. To the contrary, they broadly agree with the synergies outlined and don’t think there’s meaningful antitrust risk.
Tennat’s CEO, Chris Killingstad, has now been at the helm for almost 15 years. The company has said in the past that Chris and Tom Paulson, the former CFO, would likely leave the business around the same time. Tom retired last year. Therefore, it wouldn’t be surprising if Chris departed from Tennant in the near future. This is important because Tennant (under Killingstad’s watch) was the main opponent to a combination and new management could reexamine the proposal with a fresh set of eyes.
Primestone and Kirkbi (the Lego’s family’s investment arm) recently won board representation at Nilfisk. Given Primstone’s strong thoughts on the value creation from a potential combination, it would seem likely that these new board members would be proponents of revisiting the idea.
In March of 2019, Tennant announced a new board member, Maria Green who is the general counsel at IR. Her speciality is M&A. Her husband works at the FTC. The below link is a dated profile of her from the Chicago Tribune when she was still an M&A lawyer at ITW. As it states, “executives, including former chairman and CEO David Speer, sought her out when working on deals.” Link here: https://www.chicagotribune.com/business/ct-xpm-2013-05-06-ct-biz-0506-executive-profile-green-20130506-story.html
In March of 2019, Nilfisk’s CEO and Chairman each bought stock in the open market. The CEO’s purchase was particularly notable as he bought over $1m in USD terms.
Nilfisk recently let go of its head of the Americas segment and the CEO is currently overseeing this group. As such, he claims to be spending a good chunk of his time at their MN headquarters. This happens to be a 15 minute drive from where TNC is based.
There’s a final reason to think a deal might not be dead and that’s the rapid advancements in autonomous cleaning. At the time of Primestone’s original proposal this was still a much more nascent market. Indeed, autonomous was a big part of the bull case on Nilfisk at the time of spin as it’s at the forefront of this shift and launched the industryʼs first autonomous machine (the Liberty A50) in 1Hʼ18. The thinking at Tennant, however, was much more muted. As the CFO said at an investor conference in November 2017, “no one is making any money at it yet, and itʼs a bit of a novelty.”
Things changed fairly quickly thereafter. In April 2018, Tennant announced a partnership with Brain Corp, an AI company backed by SoftBank that specializes in the software behind “intelligent floorcare.” At Q1ʼ18, Tennant announced plans to launch an autonomous floor care machine (the T7 scrubber), and by Q3ʼ18 they announced that they had taken their first order. Nilfisk, which had already forged other partnerships and taken its own autonomous orders, announced an identical partnership with Brain Corp last month. And then, just last week, WMT announced it was ordering close to 2,000 autonomous machines (mainly from TNC and a smaller private player called ICE). It seems likely that others will follow.
Given the faster than expected adoption of autonomous, there’s additional strategic rationale for NLFSK and TNC to join forces: to share the R&D burden and solidly their leadership position. This is also true because Brain Corp (the current “brains” behind the autonomous software) doesn’t seem to care who’s machine they are on. Brain has four models featured on its website and only one is a Tennant machine (the T7 scrubber). A combined Tennant and Nilfisk would have greater influence over Brain Corp and enhanced resources to develop their own software - an important consideration if you believe this is the future growth driver of the industry.
I certainly appreciate that all of this may sound a bit speculative at best and conspiracy theory-ish at worst. That said, it’s worth pondering because the potential synergies from a combination present significant upside.
Both companies are expected to earn about $135m in CY19 EBITDA (USD terms). Both have TEVs of about $1.5b USD and hence both trade around 11x forward EBITDA. Primestone suggested cost synergies of $140m and neither company has disputed this number. If I assign 1/2 of those synergies to Nilfisk and apply 11x “synergized” EBITDA, I get to value of 480 DK, up 65-70% from the current price.
If this came to pass, the combined business would be the market leader with 25% share. It would have $2b in revs with 20% EBITDA margins and limited capital intensity with CapEx at 1-2% of revs. Given low but steady organic growth, my bet would be that New Co would fetch a higher multiple than TNCʼs historic 9-13x EBITDA and would be a good stock given the cost synergy upside.
If this doesnʼt come to pass, Nilfisk has the outline of a good spin setup on its own: a high quality business with a plan to improve operations that tripped out of the gate and, as a result, trades at a relatively undemanding valuation (11x EBITDA on CY19 and closer to 10x on CY20). The company reported an EBITDA margin of 11.5% in 2018 and is guiding to 13.2% by 2020 (this is apples-to-apples prior to adjustments from IFRS 16) with organic growth projected at 3-5%. Most of this margin improvement should come through cost cutting, simplification and procurement optimization as the business was not particularly well run under NKT’s watch.
While you could own TNC on a similar thesis, I prefer Nilfisk given the stand-alone business improvement case and, similar to yarak’s thoughts, I am skeptical of TNC’s lack of historical execution. In addition, given Nilfisk’s recent spin and motivated shareholder base, my hypothesis is that NLFSK would be the more likely target in a future acquisition scenario.
This report (the “Report”) with respect to Nilfisk Holdings A/S (the “Issuer”) has been prepared by the author (the “Author”) for informational purposes only. The Report contains certain forward-looking statements and opinions which are based on the Author’s analysis of publicly available information believed to be accurate and reliable. While the Author believes that such forward-looking statements and opinions are reasonable, they are subject to unknown risks, uncertainties and other factors that could cause actual results to differ materially from those projected. The Author has no obligation to inform readers of changes in such forward-looking statements and opinions and no warranty is made with respect to the accuracy or completeness of any of the information set forth herein.
As of the date the Report is published, the Author and/or certain entities (the “Entities”) affiliated with the Author hold a long position in the securities of the Issuer and therefore have a financial interest based on changes in the price of the Issuer’s securities. The Entities may increase, decrease or otherwise change their position in the securities of the Issuer based on changes in market conditions or other analysis. Neither the Author nor the Entities undertake any responsibility to inform readers of changes in such position.
Nothing in this Report constitutes investment advice. Readers should conduct their own due diligence and research and make their own investment decisions.
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