DENVER—Gates Industrial Corp. P.L.C. has filed for an initial public offering that could bring in about $500 million and will be used to pay down the debt of its private equity owner, according to a market analyst.
The company's Form S-1 registration filing of Dec. 27 with the U.S. Securities & Exchange Commission showed plans to list on the New York Stock Exchange under the symbol GTES, and for current owner Blackstone Group L.P. to retain a majority of the voting power.
The filing does not include the total number of shares to be issued, the anticipated target share price, or when the planned IPO will be launched. It does list a proposed maximum aggregate offering price of $100 million as a placeholder figure likely to change.
The net proceeds from the offering will be used to redeem $283.1 million of its 5.75 percent senior notes and an additional number of its 6 percent senior notes, both due in 2022. The remainder, if any exists, can be used to repay other outstanding indebtedness.
There are no current plans to pay dividends on ordinary shares.
Formerly known as Gates Corp., the Denver-based company organized the new Gates Industrial Corp. P.L.C. entity in September under the laws of England and Wales, according to the filing.
A Gates spokesman said the company cannot comment on the filing because it is in a "quiet period." By law, company officials can't publicly promote the stock until after regulators approve the filing.
But Kathleen Smith, principal and manager of IPO exchange-traded funds for Renaissance Capital, said the stock offering will be used to pay down debt incurred when funds affiliated with Blackstone acquired Gates in July 2014 for $5.4 billion in a leveraged buyout.
The filing lists Gates' current total indebtedness at about $3.92 billion.
Based on the size of the business and its track record, Smith said the IPO could be worth about $500 million.
"We are estimating that it's a $500 million IPO, which is a decent-sized IPO," she said. "Larger deals tend to be of more interest to investors, so it looks like it will be sizable enough to have interest. The median deal size was $120 million in 2017, so it'll likely be one of the larger deals for 2018."
The IPO will be underwritten by a number of financial institutions, led by Citigroup, Morgan Stanley and UBS Investment Bank.
By the numbers
The SEC statement also gave a snapshot of Gates' financial position and business holdings.
During 2016, Gates posted sales of $2.75 billion, with a net income of $84.3 million, according to the filing. For the first nine months of 2017, net sales increased 8.7 percent to $2.26 billion from $2.08 billion for the same period in 2016. Net income through September was $52.5 million, compared to $69 million in 2016, a decrease of 32 percent.
Gates currently has about 13,500 employees worldwide, with about 5,500 located in North America; 3,000 in Europe, the Middle East and Africa; 4,000 in China and East Asia; and 700 in South America. The company, with its corporate operations center in Denver, has a presence in 30 countries.
It derived 47 percent of its 2016 revenue from North America, followed by 26 percent from the Europe, Middle East and Africa region, and 23 percent from Asia.
The company, founded in 1911 by Charles Gates, is focused mainly in the power transmission and fluid power markets. It was acquired in 1996 by Tomkins P.L.C., which itself was acquired by Onex Partners and the Canada Pension Plan in 2010. The individual Tomkins companies were divested, and Gates was sold to Blackstone in 2014.
Gates established a new executive leadership team in 2015, appointing Ivo Jurek as CEO and David Naemura as chief financial officer. According to the filing, "investments have been made to shift the organization from a regional model to a global product-line model by building out a global product-line management function and globalizing our engineering teams into product-line focused groups." The shift allowed the company to focus on growth initiatives.
Through its businesses, Blackstone had total assets under management of about $387.4 billion as of Sept. 30, according to the filing. The number of shares to be owned by Blackstone is not currently listed in the filing.
Gates made two acquisitions in 2017—Atlas Hydraulics, a designer and manufacturer of hydraulic hose and assemblies, and TechFlow Flexibles Ltd., a manufacturer of fluid power and power transmission products. The financial details for both deals were undisclosed.
Both acquisitions are part of a growth strategy to develop industrial businesses, with the possibility for more acquisitions coming, Tom Pitstick, Gates chief marketing officer, said in a prior interview about Atlas.
Growth and finances
In terms of growth, the company aims to further penetrate an estimated $59 billion addressable market through multiple strategies. According to the filing, Gates plans to gain more business in industrial power transmission applications, extend its product line in fluid power, drive technical market innovation, grow and invest in emerging markets, and pursue strategic acquisitions.
Gates has two reporting segments: Power Transmission, which accounted for 66.2 percent of Gates' net sales for the first nine months of 2017, and Fluid Power, which accounted for 33.8 percent.
Net sales for Power Transmission through Sept. 30 increased 6.3 percent to $1.5 billion, from $1.41 billion in 2016. The increase was thanks mostly to higher sales volumes, with no significant impact from pricing, according to the filing.
More than half of the volume gains came from sales to industrial end markets, with sales to the general industrial end market being the largest component and registering growth of 11.7 percent. The end market benefited from continuing industrial improvement, particularly in North America. The remainder of the sales volume growth came from the automotive end market, driven primarily by strong demand in China.
The Power Transmission segment reported an operating income of $227.3 million for the first nine months of 2017, compared with operating income of $180.5 million for the same period in 2016, an increase of 25.9 percent.
Net sales for Fluid Power for the first nine months of 2017 increased 13.6 percent to $763.6 million, from $672 million in 2016. The increase was due primarily to higher volumes and higher sales prices.
Volumes grew across all end markets in the segment compared with the prior year period, with almost all of the increase coming from sales to industrial end markets. Sales to the construction and agriculture end markets, which made up about 40 percent of Fluid Power's net sales for the period, improved by 21.1 percent and 12.4 percent, respectively. Sales to the energy end market increased by 17.8 percent, driven by a 23.3 percent increase in oil and gas sales, particularly in North America.
The Fluid Power segment reported operating income of $83.1 million for the period, compared with operating earnings of $56.8 million in the previous year, an increase of 46.3 percent.
Gates said 64 percent of its revenues come from replacement market channels.
Plans for growth in particular will affect potential valuation, Smith said.
"We have to see growth out of the company," she said. "The IPO market is about doing things that help improve growth. And the track record of this company, at least it looks to us recently the growth has been flat.
"But I think investors are going to look at this as a play on the improved economy and investment in infrastructure, and possibly a pickup in energy, which has been in the doldrums over the last year. So it's a big enough deal."
Along with the spaces left blank for total number of shares and market cap, timing for the IPO is also unknown. That could mean more details to come in a few months as the deal proceeds, Smith said.
"It could be this deal doesn't come until March or April at the earliest," she said. "It costs a lot of money to get where they are now. So they have an intention of moving along. But there's a lot of blanks in here."
Overall, the company's timing for an IPO is positive, as similar deals in 2017 have performed well, she said. Of the 17 such offerings, nine were priced below the midpoint of their range, meaning they didn't receive the requested price, as she said investors have been cautious of highly leveraged companies.
"However, once they came out, they have traded well," Smith said. "This group last year ... returned 35.5 percent, so they had a very strong performance."
As a group, industrial companies in particular are of interest to investors, Smith said. "I think their timing is good, for this type of business, for Gates," she said.