OSAKA Daikin Industries Ltd (6367.T) will buy Goodman Global Inc HELLFG.UL for $3.7 billion, gaining greater access to a recovering North American housing market and making the Japanese company the world's largest maker of heating, ventilation and air-conditioning (HVAC) systems.
Daikin has long been interested in its Houston, Texas-based rival, but put off takeover talks following Japan's devastating earthquake and tsunami last year and then later due to uncertainty over the global economy.
The deal will strengthen Daikin's business in duct-type air-conditioners, where ducts are used to ventilate buildings, the prevalent technology used in the United States, analysts said.
"They've tried for so long to break into the U.S. residential air-conditioner market with their ductless technology, but it's just not happening, so acquiring into that market is the only way to go," said Edward Bourlet, a machinery analyst at CLSA Asia Pacific Markets in Tokyo.
Daikin derives less than 10 percent of sales in its major air-conditioning segment from the Americas, where rivals include Johnson Controls Inc's (JCI.N) York, Lennox International Inc (LII.N), and Ingersoll Rand Plc's (IR.N) Trane.
The Japanese firm, helped by a strong yen, will pay $3.7 billion in U.S. dollars in an acquisition that will allow it to overtake top-ranked Carrier brand maker United Technologies Corp (UTX.N) as the world's top HVAC maker.
Media reports ahead of the announcement caused Daikin shares to fall on Wednesday on worries the price was too high. Daikin acquired Goodman from private equity firm Hellman & Friedman.
BET ON U.S. HOUSING RECOVERY
Goodman, which recorded 2011 sales of about $2.1 billion, is a low-price competitor, so the deal may put some pricing pressure on the HVAC industry, said analyst Rob Wertheimer of Vertical Research Partners.
"It's not that easy to enter North America," he said, noting that the U.S. market of air conditioning dealers and installers is highly fragmented. The deal gives Daikin access to about 900 distributors.
For U.S. peers, a new, bigger rival is a slight negative, said Edward Jones analyst Matt Collins, although global competition is nothing new for large diversified manufacturers like United Tech's Carrier brand.
"Carrier has been restructuring for the last five years, taking out almost half its factories and streamlining its work force, so it's not as if they've been sitting back enjoying the ride," Collins said.
"Recent signals of a U.S. housing recovery probably sweetened the deal for Daikin," he added.
United Tech and Ingersoll shares were down slightly in New York trading even as most manufacturing shares gained. Lennox stock lost about 1 percent.
Daikin shares initially tumbled nearly 9 percent before trimming losses to finish 3.5 percent lower, their biggest drop in three weeks. The benchmark Nikkei 225 average .N225 settled 0.4 percent higher.
"The stock is being sold on the view that price of 300 billion yen is a little steep when you look at sales and other data from Goodman," said Tomoichiro Kubota, senior market analyst at Matsui Securities in Tokyo.
"(However) competing against Chinese rivals by boosting scale and location is a move in the right direction (for Daikin) and individual investors seem to be buying shares at the low prices," he added, after the stock trimmed losses.
Daikin will not turn to equity markets to fund the deal but use loans, cash reserves and will tap a bond issue of about 50 billion yen, a company official said earlier on Wednesday.
Daikin aims to complete the deal, which is Japan's third-biggest so far this year, in the fourth quarter. The Japanese company expects 24 billion yen in strategic and efficiency benefits from the purchase in three years.
Backed by the strong yen, outbound M&As by Japanese firms had a total value of more than $46 billion in the year to date, slightly higher than the same period in 2011, when outbound deals hit a record for the calendar year, according to Thomson Reuters data.
In terms of Japan Inc's overall mergers and acquisitions for the year to date, 40 percent have been between domestic firms, while a third were with U.S. companies and 17 percent with Asian firms outside Japan.
San Francisco-based Hellman & Friedman bought Goodman Global in October 2007 in a deal valued at $2.65 billion.
The deal comes more than two years after Goodman Global filed for an initial public offering in May 2010. The company withdrew its IPO registration later that year, and a source at that time said it had explored a possible sale to Daikin and other potential buyers.
The deal by Hellman & Friedman is the latest in a string of sales for the private equity firm this year which included offloading its holdings in photo agency Getty Images Inc and restructuring advisory firm AlixPartners.
Barclays (BARC.L) and JPMorgan Chase (JPM.N), which were listed as the lead underwriters in Goodman's 2010 IPO filing, advised Hellman & Friedman on the transaction. Bank of America Merrill Lynch and GCA Savvian advised Daikin.
($1 = 78.5000 Japanese yen)
(Additional reporting by Michael Erman, Soyoung Kim and Nick Zieminski in New York; James Topham and Daiga Iga in Tokyo; editing by Edwina Gibbs, Ryan Woo, Matthew Lewis and Kenneth Barry)