Chart has signed a definitive agreement to acquire Howden, a leading global provider of mission critical air and gas handling products and services, from affiliates of KPS Capital Partners, LP. The purchase price is US$4.4 billion and will be funded through a combination of cash and shares of a newly created class of preferred stock. The acquisition is subject to the receipt of certain regulatory approvals and the satisfaction of other customary closing conditions and is expected to close in 1H23.
The acquisition will result in estimated combined revenue of approximately US$3.4 billion based on the trailing 12 months as of 31 August 2022. The purchase price represents 12.9x Howden’s adjusted EBITDA for the 12 months ended 31 August 2022, or 8.5x including estimated annual cost synergies of US$175 million to be achieved in the first 12 months of ownership (US$250 million annual cost synergies by year three). In addition to cost opportunities, Chart has identified significant commercial synergies that are expected to reach US$350 million annually by year three.
Howden, headquartered in the UK, is a leading global provider of mission critical air and gas handling products providing service and support to customers around the world in highly diversified end markets and geographies. Howden manufactures highly engineered fans, compressors, rotary heat exchangers, steam turbines, and other air and gas handling products, services, and solutions. With over 160 years of experience as a world-class application engineering and manufacturing company, Howden enables customers to achieve environmental and operational targets and efficiencies, including decarbonisation of operations.
“The combination of Chart and Howden furthers our global leadership position in highly engineered process technologies and products serving the Nexus of CleanTM – clean power, clean water, clean food, and clean industrials. The offerings of Chart and Howden are highly complementary, bringing multiple cost synergies, commercial synergies and efficiencies in the first year, along with significant aftermarket, service and repair exposure, which lifts the margin profile of the combined business, adds resiliency and broadens our end markets,” stated Jill Evanko, Chart’s CEO and President. “The two companies have shared customer-centric values and are both very committed to innovation which will result in expanded reach into global markets and acceleration in product development.”
Strategic benefits
- Highly complementary offering will expand Chart’s equipment portfolio and process technology offering for multiple molecules and applications across high growth areas. The expanded portfolio will increase scale, bring synergies and drive growth in areas including hydrogen, carbon capture and storage (CCUS), decarbonisation of industries, water treatment, petrochemical, LNG, air separation, and natural gas processing.
- Assurance of supply and control of the manufacturing process and schedule for critical equipment in Chart’s process technology offering. Lead-time and delivery schedules are top customer decision points for placing orders in liquefaction, given the macro trend of energy access and resiliency and desire for fastest implementation. Chart will benefit from integrating Howden’s compressors in its offering where applicable as compressors are the longest lead-time item in the current environment for hydrogen, helium, and small scale LNG liquefaction.
- Additional end markets and geographic expansion for the Nexus of Clean – clean power, clean water, clean food, and clean industrials. The combination of the two companies will create a more diversified business while staying focused on Chart’s core engineering and manufacturing for liquid, air and gas handling and storage. Howden’s strong presence in regions, such as Europe, Middle East, Africa and Southeast Asia, as well as applications in cement, marine, mining, and nuclear, will allow the company to expand its customers and projects using a combined solution offering, while Chart’s exposure to LNG (particularly small scale LNG, which is applicable to Howden’s product offerings), water, CCUS and hydrogen in a variety of regions, will pull Howden’s equipment through at scale to these markets.
- Strong intellectual property and patent portfolio adds to Chart’s highly differentiated and difficult to replicate offering. Howden has 450 issued patents and patent applications across multiple jurisdictions worldwide and over 800 trademark applications and registrations worldwide adding to Chart’s existing portfolio of 778 patents and patent applications and 569 trademark applications and registrations.
- The combination of the two companies will produce a business with significant aftermarket, service, and repair exposure. Aftermarket, service and repair comprise approximately 48% of Howden’s and approximately 14% of Chart’s revenue. Combined, this will be over 30% of pro forma revenue with approximately 42% gross margin as a percent of sales. The addition of this high-margin aftermarket business will lift the combined margin profile, add resiliency and reduce cyclicality.
- Applying the Chart playbook to significantly increased scale. After closing, Chart will quickly take advantage of the One Chart global commercial and global engineering approach, which will, with Howden’s engineering and manufacturing expertise, allow for more first-of-a-kind opportunities and double-digit global growth.
- Both companies have a history of inorganic investment integration. In the past three years, Howden completed seven highly-synergistic bolt-on acquisitions, and in that same time period, Chart completed 10 strategic bolt-on acquisitions and divested two non-core businesses. Both teams have experience in and dedicated resources for successful integration planning and execution.
Financial benefits
- Chart and Howden combined backlog of approximately US$3.7 billion as of 30 September 2022 supports near-term double-digit growth outlook. This growth outlook is furthered by the short book to ship timeframe of the aftermarket, service and repair portion of Howden’s business, which is approximately 46% of the order book.
- Significant cost synergies of approximately US$175 million and revenue synergies of US$150 million expected to be delivered in the first 12 months after closing.
- Created by regional overlaps and scale that can be achieved when combining two mid-size companies with different geographic strengths.
- Combined customer base has little overlap, bringing opportunities to pull through sales for a broader set of products from both companies.
- Manufacturing optimisation and insourcing with additional immediate capacity for both businesses supports Chart’s ability to continue to deliver broad-based growth.
- Combined service footprint and installed base provides for significant aftermarket growth synergies, especially when combined with Howden’s digital Uptime offer-ing, and its established IOT platform ranging from simulation software to performance monitoring software. Howden’s 41 service centre locations around the world and 18 manufacturing sites will significantly grow Chart’s aftermarket capabilities.
- Significant total solution offering expansion opportunities exist as the products and services of the two companies are complementary. Examples include Chart’s water treatment technology with Howden’s aeration offering, and expanding the hydrogen reach deeper in gaseous hydrogen applications.
- Strong free cash flow generation and year-one margin and earnings per share (EPS) accretion after closing.
- The combined business is expected to generate over 90% free cash flow conversion in the first 12 months of ownership, inclusive of cash flow from synergies. This leads to an estimated pro forma net leverage ratio in the high 2x range by the end of 2024, assuming a 1H23 close of the acquisition.
- The acquisition is expected to be accretive to EBITDA margins, free cash flow and EPS in the first full year of ownership.