Colfax is pitching its bond-financed acquisition of DJO Global on the expectation that the combined company will be able quickly delever by selling its air and gas handling business, according to six buysiders following the deal.

Asset sales aside, however, investors are skeptical of execution risk as industrial manufacturer Colfax integrates DJO, a medical device company, the buysiders added.

Led by JPMorgan, the USD 1bn senior unsecured notes offering is split between a five-year tranche, whispered in the 6.5% area, and a seven-year tranche, whispered in the 7% area. The notes are expected to be rated Ba2/BB+, with pricing expected tomorrow.

Proceeds will finance Colfax’s acquisition of DJO Global from Blackstone for USD 3.15bn in cash, representing a multiple of 11.7x LTM EBITDA, according to the lender presentation. Colfax announced the acquisition last November.

The deal will increase Colfax’s leverage by about two and a half turns to 4.7x, based on USD 3.891bn in total pro forma debt and USD 828m in combined LTM adjusted EBITDA. That figure, which deal documents refer to as “leverageable” EBITDA, includes USD 57m in expected cost savings.

The cost savings are based on expected “integration synergy” with Colfax’s fabrication technology business and “reorganization of existing production sites, internal restructuring and personnel realignment” in Colfax’s air and gas handling segment, according to deal documents.

Colfax executives said they then aimed to sell the company’s air and gas handling division, which two sources estimated could lower leverage to 4.3x, assuming an estimated asset value of USD 1.1bn-1.3bn and a USD 200m decrease in EBITDA.

Some sources said the strategy seemed ambitious. “They have an asset sale they need to execute, they have to integrate a business that’s different from what they’ve run,” said one of the buysiders.

Colfax’s pro forma liquidity totals USD 837.3m, with USD 214m in cash and USD 623.3m of revolver availability.

Delevering assets

Pro forma the DJO acquisition, Colfax’s business can be broken down into three segments: Colfax’s fabrication technology segment (45% of pro forma expected sales), Colfax’s air and gas handling segment (30% of sales) and DJO (25% of sales).

The company is targeting leverage in the mid-3x area by the end of 2019, according to deal documents that said this could be achieved by the asset sale as well as other strategic options.

“If they get the asset sale done I think [the notes] will be attractive. If they don’t, I think it will just be essentially market risk, so it’s not that exciting,” one of the buysiders said.

To achieve a leverage metric of 3.5x or lower by the end of 2019, the company will likely need to achieve organic EBITDA growth or pay off debt in addition to the asset sale, sources said.

Though the company will likely successfully divest the air and gas assets, sources suggested viewing free cash flow both before and after in case the sale does not occur.

Taking into account the DOJ acquisition but not the upcoming divestment, FCF shakes out at roughly USD 390m-USD 508m (10%-13% of total debt), based on USD 770m to USD 828m in EBITDA, USD 90m to USD 150m in capex, USD 30m in cash taxes and USD 200m in interest costs, sources projected.

If the asset sale were to happen and proceeds were used to pay down debt, leverage would decrease, and FCF might tighten slightly to around USD 240m-358m (9%-13% of total debt), based on USD 570m-628m in EBITDA, USD 90m-150m in capex, USD 30m in taxes and USD 150m in interest expense, the sources said.

Disparate businesses

Though diversification is generally a positive for credit investors, several buysiders said they are wary of the purpose of this acquisition because the two businesses are in such different sectors.

“It’s a healthcare business with an industrial business that’s selling off another industrial business,” one of the buysiders said.

Colfax’s legacy fabrication technology segment supports the manufacturing of welding and cutting products, while the air and gas handling segment supports the manufacturing of heavy-duty fans and compressors, according to deal documents.

Colfax will have to learn to manage a medical device company, a departure from its roots, sources said.

“DJO and Colfax have two different selling models,” said one of the buysiders. “Colfax sells its products to the people who are using them, whereas DJO sells its products to healthcare providers or the people who prescribe the products to the people who are using them.”

The mix of businesses makes Colfax difficult to comp, said four buysiders, although one pointed to 3.2x-levered SPX Flow, an industrial equipment manufacturer.

SPX should trade tighter than Colfax because of its lower leverage and the risks around Colfax’s asset sale and integration of DJO.

SPX’s B1/BB- USD 300m 5.875% senior unsecured notes due 2026 traded yesterday (29 January) at 98.25 to yield 6.168%, according to MarketAxess.

JPMorgan declined to comment. Colfax did not respond to a request for comment.

2019 Debtwire