Linamar looks to diversify revenues outside auto industry

Company buying MacDon for $1.2 billion

Linamar Corp.’s chief executive says its $1.2-billion acquisition of a Winnipegbased agriculture equipment maker will help the company boost sales and diversify revenues beyond its auto parts manufacturing division, as uncertainty over NAFTA renegotiations looms.

Guelph-based Linamar announced Thursday after the Toronto Stock Exchange closed that it will acquire MacDon Industries Ltd., a family-owned company that reported $600 million in revenues in the last 12 months and earnings before interest, taxes, depreciation, and amortization (EBITDA) of approximately $155 million.

“We like the idea of diversifying beyond the automotive powertrain and driveline ... manufacturing that we do today,” Linamar’s chief executive officer, Linda Hasenfratz, said in a conference call with analysts Thursday.

“It provides us diversification into an opportunistic market, it provides innovation as MacDon is considered an innovative market leader in all of their products, and of course it gives us growth both immediately and longer term as we grow the business globally.”

Linamar’s stock responded favourably to the news, with shares closing Friday at $72.50, an increase of 11.5 per cent.

Last year, Linamar reported $5.14 billion in sales in its automotive powertrain and driveline division, while industrial sales — which include SkyJack and its existing agricultural equipment business — accounted for $866 million. In the threemonth period ending Sept. 30, sales remained similar, with auto parts accounting for $1.29 billion in sales while industrial sales totalled $260 million. Going forward, sales from MacDon will be recorded under Linamar’s industrial segment.

“We like the idea of having diverse markets and more avenues within which to grow the company,” Hasenfratz told analysts Thursday. “As noted we have a long-standing history in the (agriculture) market and we think it adds significant size and scale with our existing agricultural equipment platform.”

The move to diversify revenues comes in the midst of NAFTA renegotiations that have grown increasingly contentious in recent months. The fifth round of talks wrapped up in Mexico City last month with little progress on major issues, including auto rules of origin.

Linamar is one of many Canadian companies that stands to be affected by the negotiations, particularly if there are substantial changes to auto rules of origin, which stipulate how much North American-made content must be in a vehicle. According to a data analysis compiled by Bloomberg, the autoparts manufacturer remains vulnerable to a 50 per cent U.S.-specific rule of origin, something the Americans have demanded. Bloomberg said just 27 per cent of Linamar’s North American fixed assets are concentrated in the U.S.

While MacDon, which was founded in 1949, has 1,400 sales dealers around the world, it produces its agriculture equipment at its facility in Winnipeg. A majority of its sales are within North America, which Hasenfratz said provides Linamar the opportunity to expand the business globally.

“(This is) clearly enhancing our position as a global diversified manufacturer,” Hasenfratz said.

Hasenfratz also told analysts that the timing to acquire MacDon was ideal as the agricultural market is in the early stages of cyclical recovery, which could provide growth upside for Linamar.

RBC Capital Markets analyst Steve Arthur wrote in a client note that the deal was “a bold step” in the direction of adding to its existing business. CIBC analyst Todd Coupland said in a note that the acquisition will add about 70 cents to Linamar’s estimated earnings per share of $9 in 2018.

“Longer term, we still believe the negative sentiment towards the auto sector will need to resolve itself to achieve fair valuation,” Coupland wrote. “This is out of the company’s control and will adjust for the overall automotive supply chain.”

MacDon’s executive team will stay on through the acquisition and continue managing operations.

WE LIKE THE IDEA OF HAVING DIVERSE MARKETS.