SPX Flow Considers Selling Itself, Sending Stock Soaring

After turning down an offer from industrial giant Ingersoll Rand (NYSE: IR), SPX Flow (NYSE: FLOW) has announced that it is now in fact considering selling itself. The company announced on Monday morning that it will explore strategic alternatives, a process that could potentially result in a sale or merger. 

Investors had already cheered the rejected offer of $85 per share in cash, as SPX Flow’s board of directors argued that the proposal significantly undervalued the company. With the confirmation that SPX Flow is open to a possible deal, the stock has soared by 10% as of 11:50 a.m. EDT. Here’s what SPX Flow investors need to know.

A possible bidding war is brewing

In recent months, Ingersoll Rand made two separate unsolicited offers to acquire SPX Flow as part of its efforts to expand its industrial pumps business. The initial offer was for $81.50 per share, and the suitor boosted the offer to $85 per share. SPX Flow spurned both overtures, even though both represented meaningful premiums that would value SPX Flow stock at all-time highs.

“After careful review with its legal and financial advisors, and with the recommendation of a committee of independent directors formed to evaluate the potential transaction, the Board concluded that the proposals did not adequately value the Company in light of the Board’s confidence in the potential for increased profit margins and growth associated with the Company’s successful execution of its strategic plan,” SPX Flow said in a statement. 

Additionally, SPX Flow confirmed that it has received “additional inquiries” from “interested parties,” without providing additional details around other potential offers. Investors are understandably excited about the prospect of a bidding war for SPX Flow, which said it will “engage with multiple parties” to evaluate its options.

The company warned that the review may not result in a deal and that SPX Flow will not provide any more public comments until the process is complete and a decision has been finalized. It’s not uncommon for leaks to occur in such scenarios, but SPX Flow won’t comment until disclosure is necessary.

Setting the strategic plan in motion

At SPX Flow’s investor day in March, the company laid out a multi-year strategic plan to expand profitability, improve the quality of revenue, and streamline operations. The company is targeting a gross margin of approximately 40% in 2023, up from the 34.7% gross margin that it reported in 2020.

SPX Flow plans to focus its investments on opportunities that will generate high returns, including a combination of capital expenditures, M&A activity, and returning cash to shareholders through dividends.

The goal includes delivering a return on invested capital (ROIC) that is greater than the company’s weighted average cost of capital (WACC). Leveraging debt to fund the initiative can reduce SPX Flow’s WACC, as debt capital is generally cheaper than equity capital.

The company is in the early stages of embarking upon the strategy, which would create considerable shareholder value if SPX Flow can execute. The board must now decide if it can create more value as a standalone company or if it should accept a takeover offer.

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Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Millennial Money is part of The Motley Fool network. Millennial Money has a disclosure policy.

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