Shares of Meritor Inc., a maker of axle, braking and electric powertrain components, were headed toward a 24-year high Tuesday, after the company announced a deal to be acquired by diesel truck engine maker Cummins Inc. for $3.7 billion in cash.
soared about 45% to put it on track for its biggest one-day percentage gain since July 31 of 2009, and its highest closing level since May 12, 1998.
Columbus, Indiana-based Cummins
will pay $36.50 in cash for each Meritor share, equal to a 48% premium over Friday’s stock closing price of $24.67. The buyout bid price implies a market capitalization for Troy, Michigan-based Meritor of $2.58 billion.
The deal will expand Cummins’ offering of engines and help it become one of few companies that can provide powertrains for both combustion and electric power trucks.
“Climate change is the existential crisis of our time and this acquisition accelerates our ability to address it. Our customers need economically viable decarbonized solutions,” said Tom Linebarger, chief executive of Cummins, in a statement.
Cowen analysts said the headwinds facing diesel are the main reason for long-term bearishness on Cummins.
“We see the Meritor acquisition as another example of Cummins’ ability to walk the thin line of maintaining and growing market share in the gradually decarbonizing diesel technologies, while at the same time helping to lead the transition to new power,” analysts led by Matt Elkott wrote in a note to clients.
Cowen rates Cummins stock at outperform with a $284 stock price target that implies 32% upside over its current price. The note described the company as the “Netflix” of engines, not the ”Blockbuster” of engines.
The deal is expected to be immediately accretive to Cummins’ adjusted per-share earnings and to generate annual pretax run-rate synergies of about $130 million in the third year after closing.
Cummins will finance the deal using a mix of cash on hand and debt.
Meritor has a more than 110-year history and employs more than 9,600 people serving customers in the commercial truck, trailer, off-highway, defense, specialty and aftermarket services markets.
Shares of Meritor were down 1.8% Tuesday and have lost 14% in the last 12 months, while the S&P 500
has gained 10%.