By Lewis Krauskopf
(Reuters) - 3M Co (N:MMM) on Tuesday struck a deal to boost its presence in worker protection gear by buying Capital Safety from private equity firm KKR & Co (N:KKR) for $1.8 billion (£1.15 billion), the U.S. diversified manufacturer's largest-ever purchase.
The transaction moves 3M Chief Executive Officer Inge Thulin closer to 3M's five-year goal of $5 billion to $10 billion in acquisitions through 2017. It also comes as other industrial companies, such as Honeywell International Inc (N:HON) and United Technologies Corp (N:UTX), are scouring for deals.
"We have been looking for 3M to step up its acquisition activity," Edward Jones analyst Matt Arnold said. "The company has done a lot in the past few years to really get its house in shape in terms of margins, and now it's time to deploy its capital to grow."
Capital Safety sells harnesses, lanyards and other gear for workers in construction, mining and other industrial sectors. It stands to expand 3M's personal safety business, which includes respirators, protective eyewear and safety apparel.
3M, which also makes Post-it notes and Scotch tape along with a variety of adhesives, films and abrasives, pointed to rapidly growing demand for protective gear fuelled by increasing worker-safety regulations globally.
The personal protective equipment market is more than $25 billion globally, and growing by 3 percent to 4 percent a year, according to 3M. The market for fall-protection gear that involves Capital Safety's products is $1.6 billion, but rising by 5 percent or more.
St. Paul, Minnesota-based 3M put the Capital Safety deal's value at $2.5 billion, including about $700 million in net debt. Headquartered in nearby Bloomington with about 1,500 employees, Capital Safety recorded $430 million in sales in its latest fiscal year and has increased revenue by 10 percent a year on average over the past four years, according to 3M.
That growth rate made the deal more palatable to some analysts, who deemed the purchase price expensive at 14 times annual earnings before interest, taxes, depreciation and amortisation.
Morningstar analyst Barbara Noverini said the deal was a good strategic fit, in part because of 3M's potential to use its technologies to improve Capital Safety's products, such as by adding reflective webbing to a safety harness.
Under KKR, Capital Safety expanded internationally, with new manufacturing and training facilities in China. It quadrupled its business in Brazil and grew its business revenue in the Middle East and Africa by more than 80 percent.
"Inge Thulin and I have been talking for a while, we had dinner in New York, we agreed to do it fast, and that was it," Pete Stavros, the head of KKR's industrials investment team, told Reuters. "It shows you he has a strategic mindset, he decided to fill out 3M's line in safety products with a global leader."
KKR stands to make three times its $615 million equity investment in Capital Safety, according to a person familiar with the matter who asked not to be identified discussing confidential information.
3M expects the deal to close in the third quarter and for it to add 12 cents to earnings per share in the first year, when excluding purchase accounting adjustments and one-time costs.
Analysts on average expect 2015 earnings of $7.93 per share on $31.1 billion in sales for 3M, according to Thomson Reuters I/B/E/S.
Until now, 3M's biggest deal was the roughly $1.35 billion purchase of filtration company Cuno 10 years ago, a company spokeswoman said.
Morgan Stanley (N:MS) advised 3M, while Goldman Sachs (N:GS) advised KKR.