Denmark's Danfoss sees Eaton hydraulics buy as ‘once-in-a-lifetime'

Eaton Corp. is selling its hydraulics business, including rubber and plastic hose operations, to a European-based company that sees the acquisition as a major growth opportunity that would be difficult to build on its own.

Eaton will get $3.3 billion in cash in the deal and, in return, Danfoss A/S tacks on another $2.2 billion in annual hydraulics sales.

Acquiring Eaton's operations allows Danfoss to enter the hose manufacturing business for the first time, Eric Alstrom, president of Danfoss Power Solutions, said in a Jan. 23 interview. His unit is the largest division of Nordborg, Denmark-based Danfoss.

And that's a market Danfoss has been eyeing for some time.

"Eaton Hydraulics is a company we know very well and have been studying for many years actually. We know them as a great competitor in the industry. We met each other many times for the same types of projects," Alstrom said from a Danfoss plant in Germany.

"If you look at the types of products, the end markets that they serve, the business is also extremely interesting for us because we have always looked at the industrial market as well as fluid conveyance. Of course, it's exceedingly difficult to build those kinds of businesses from scratch," he said.

So, instead, Danfoss is acquiring Eaton's extensive hose and fittings business, he said.

"It's a very sizable part of Eaton Hydraulics' overall revenue. We don't give out exact numbers. But it is a very sizable business and particularly interesting with it is it has such a vast reach. There are many different types of products in their hose portfolio," Alstrom said.

Danfoss CEO Kim Fausing said this type of deal does not come around often.

"We take a significant and transformational step in creating a global leader in mobile and industrial hydraulics. It is a once-in-a-lifetime opportunity to combine our largely complementary portfolios and geographic footprints," Fausing said in announcing the deal.

The Eaton hydraulics business posted sales of $2.2 billion and an earnings before interest, taxes, depreciation and amortization of $250 million, with about 11,000 employees. And Danfoss is paying a healthy 13.2 earnings multiple for the business.

The hydraulics business includes a wide variety of equipment and systems to serve a vast array of industrial and mobile applications.

While there are many components to hydraulic systems, rubber hoses are a key in helping hydraulics do their job, whatever that job might be. Those hoses must withstand high pressures that allow hydraulic fluids to create equipment movement. Other aspects of hydraulics include pumps, motors, valves, controls and cylinders.

While Danfoss sees an opportunity to scale up its core business, Eaton sees a way to improve overall performance.

Eaton CEO Craig Arnold said the sale "is part of the ongoing transformation of Eaton into a higher growth company with better earnings consistency."

"We believe this transaction will create substantial value for our shareholders and allow our hydraulics employees to be part of a company that has a strong commitment to the hydraulics industry," he said in a statement.

Danfoss expects to save some money on the materials procurement side by becoming a bigger operation but is not looking at making business cuts from the combined operation.

"This is a growth acquisition. We are buying a fairly well-performing business that has a great reputation in the industry, great products in the marketplace," Alstrom said. "This is not a restructuring story or one that we are looking to cost-cut to prosperity. We are looking forward to getting more momentum.

"Both of us are quite global already today. There are areas where we strengthen our presence in the U.S. and Europe, but particularly Asia, by coming together. It's just extending our network."

While Eaton is selling off the hydraulics business, the company is keeping a rubber-related segment that has been housed in that segment, golf grips. Eaton also is keeping a filtration business that was part of the unit.

Golf Pride brand grips calls itself the world's largest maker of golf club grips with research, design, manufacturing, sales and distribution locations on five continents. That business dates back more than 50 years with the introduction of a slip-on grip.

Eaton, in announcing the deal, has signaled it will wait until its upcoming Feb. 4 earnings conference call to provide more details. The company did say the transaction, which will require regulatory approval, is expected to close by the end of this year.

The hydraulics business now being sold represents about 10 percent of the company's overall sales of $21.6 billion in 2018. Eaton, several years ago, moved its headquarters to Dublin for tax purposes but keeps its operational headquarters in suburban Cleveland.

Eaton Hydraulics will merge into the Danfoss Power Solutions portion of that business, a move that essentially doubles the company's business in that segment.

Overall, Danfoss had sales of $7 billion last year with about 28,000 employees. Other markets for the company include heating, cooling, fire safety and industrial automation.

"The more we studied Eaton, the more convinced we became this would be a perfect partner for us," Alstrom said.

Buying Eaton Hydraulics and its hose business is a "scenario that we've always been eyeing and always wanted to get into," he said. "That's why we are so excited about this opportunity to get into this part of the business by means of this acquisition."