Emerson Enters Agreement to Acquire Pentair's Business Unit (revised)

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Engineering and technology behemoth Emerson Electric Co.EMR recently announced that it has inked an agreement to purchase Pentair Valves & Controls, a business unit of Pentair plc PNR . This buyout comes as part of the company's diligent portfolio repositioning strategy that had begun in 2015 to drive efficiency and growth.

This $3.15 billion buyout - which is expected to close in the next four to six months after meeting regulatory approvals - comes close on the heels of the company's announcement that it will divest its Network Power, Leroy-Somer and Control Techniques businesses.

Buyout to Bolster Automation Portfolio

Integrating Pentair's Valves & Controls business will allow Emerson to bolster its foothold in control, isolation, pressure relief valves and actuation business lines. In short, the company is trying to strengthen its automation portfolio and Pentair Valves & Controls is a strategic fit. Emerson believes that this acquisition will help it in offering a complete valve solutions portfolio and robust service network, thereby elevating its brand value.

Switzerland-based Pentair Valves & Controls has a prominent presence in chemical, petrochemical, oil and gas, power, mining and other process industries across the globe. The company's major brands - Anderson-Greenwood, Crosby, Vanessa, Keystone and Biffi - have earned an unparalleled reputation of providing valve solutions. Pentair Valves & Controls' core values such as global customer support, service, best cost sourcing and manufacturing, mirror Emerson's own, signaling easy integrating going forward.

Business Streamlining Driving Margin Growth

Emerson has taken a series of concerted efforts under its restructuring initiatives since 2015 to develop a better brand with significant customer focus. The company is resorting to devised cost cutting and divestment plans to unlock greater benefits. During third-quarter 2016, Emerson's EBIT margin expanded 20 basis points on a year-over-year basis, largely driven by benefits from restructuring actions and solid operational execution.

Recently, the company stated that the sale of three of its businesses - Network Power, Leroy-Somer and Control Techniques - will lead to $5.2 billion in proceeds. Notably, Network Power is being sold to Platinum Equity for $4 billion. Post transaction, Emerson will retain a subordinated interest in Network Power. Similarly, Japan-based Nidec is taking over the Leroy-Somer CT business. The company has also shared its plans to divest the ClosetMaid business by 2017.

Emerson believes that undertaking these extensive streamlining measures will free up resources which can be reinvested in core business areas to boost growth. Once the restructuring is complete, the company expects to be better equipped to cross-leverage its remaining portfolio and navigate businesses in an effortless manner.

Energy Market Softness Mars Prospects

Despite a dominant foothold in the energy market, Emerson's business has been hurt by the slowdown in oil and gas markets. This has affected both capital spending and operational expenditure of clients, thus marring Emerson's prospects. Also, the issue of oversupply is continuing to hamper prices and spending levels in the oil and gas sector, adding to the company's challenges. With the current economic factors at play, Emerson anticipates the dull prospects to continue till 2017.

EMERSON ELEC CO Price and Consensus

EMERSON ELEC CO Price and Consensus | EMERSON ELEC CO Quote

Also, Emerson believes global economic conditions may take a turn for the worse on account of political uncertainty which will keep spending levels considerably low for the rest of fiscal 2016. Due to such tough economic conditions and dwindling order numbers, the company forecasts underlying sales to be down 5-6% in fiscal 2016.

Emerson currently holds a Zacks Rank #5 (Strong Sell). Better-ranked stocks in the sector include Franklin Electric Co. FELE and EnerSys ENS . Both stocks carry a Zacks Rank #2 (Buy).

(We are reissuing this article to correct a mistake. The original article, published on Aug 19, 2016, should no longer be relied upon.)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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