Morgan Stanley's Takeaways From Ingersoll-Gardner Denver M&A Reports

The Wall Street Journal reported Sunday that Gardner Denver Holdings Inc GDI, a manufacturer of flow-control solutions for industrial applications, is close to finalizing a deal to merge with Ingersoll-Rand PLC IR's industrial segment.

The Analyst

Morgan Stanley's Joshua Pokrzywinski maintains an Overweight rating on Gardner Denver with an unchanged $31 price target.

The Thesis

If Gardner Denver succeeds in buying Ingersoll's industrial segment under a Reverse Morris Trust, the combined entity would combine for $6.2 billion in revenue and $1.4 billion in EBITDA in 2019, Pokrzywinski said in a Monday note. (See his track record here.) 

The combination could be also seen as a "landmark transaction" within the multi-industry space and generate "substantial" multiple expansion, as Gardner Denver would be able to unlock notable value in Ingersoll's compressor business, the analyst said. 

As it stands today, Ingersoll's margins in its industrial segment trail Gardner Denver by 500 to 600 basis points, Pokrzywinski said. Gardner Denver would be able to extract synergies and close the merger gap if a deal is finalized, the analyst said.

The combined business would also be able to show a mid-teens EBITDA growth rate, according to Morgan Stanley. 

Ingersoll investors would also emerge a winner from the deal, as the company would transform into a pure-play HVAC company with a leading market position, Pokrzywinski said.

As a pure play company, Ingersoll could re-rate higher, in Morgan Stanley's view, as its stock is trading at a 52-percent discount to rival pure-play HVAC company Lennox International Inc. LII.

Price Action

Shares of Gardner Denver Holdings were trading higher by more than 15 percent Monday morning, while Ingersoll-Rand's stock was higher by more than 6 percent.

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Photo courtesy of Ingersoll-Rand.