Eaton is finally in the market with its long-awaited benchmark-sized bond offering to help fund the acquisition of Cooper Industries. Eaton is selling 5s, 10s, 20s, and 30-year notes in a 144a offering which will help fund the $5 billion or so debt portion of the Cooper deal.
Our rating reflects the higher leverage of the combined firm, with debt/EBITDA close to 3 times up from below 2 times prior to the deal, offset by the positive strategic implication of the transaction. The Cooper deal is expected to close by year-end.
Eaton is a highly diversified provider of electrical equipment and power management products spanning a number of different end markets and geographies. We view the credit outlook as positive with management’s stated goal of bringing ratings back up to the “A” category over time. The firm’s healthy free cash flow should allow Eaton to steadily chip away at its debt load and bring leverage back towards the 2 times area in the intermediate term.
Diversified industrials tend to trade very well relative to the market. The Morningstar Manufacturing component of the Industrials index is at 121 basis points over Treasuries with an average rating of A-, while the Industrials index is at +145 for a similar rating.
Considering this and the positive credit outlook, we view fair value for the 10-year tranche around a spread of 130 basis points over Treasuries. We note that Stanley Black & Decker SWK (rating: A-) just priced a 10-year at a spread of +120, which we viewed as fairly valued. Other diversified industrial comps include Philips PHG (rating: BBB+) which has a 2022 bond trading at +95, which we view as rich.
Danaher DHR (rating: A) has a 2021 bond that trades around +100, which we view as fair to slightly cheap. Initial price talk on the 5-year tranche is a spread of +112.5, which we view as slightly cheap. We view 25 basis points as a fair concession to the 10-year, placing fair value on the 5-year at about +105.
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