2012DLJ profits from MSL sale
by Laura King and David Carey
Published in The Daily Deal
October 15, 2003
Celestica Inc., a Canadian contract electronics maker undergoing a restructuring, returned to the acquisitions market Wednesday, Oct. 15, with an agreement to buy U.S. rival Manufacturers' Services Ltd. for about $250 million in stock.
The takeover is the first since late 2001 for Toronto-based Celestica, which had been an aggressive acquirer until the electronics manufacturing sector crashed more than a year ago.
Celestica was originally spun off by IBM Corp. in 1994 and was acquired by Toronto conglomerate Onex Corp. two years later.
One stockholder in the company has been Credit Suisse First Boston's private equity arm, DLJ Merchant Banking Partners, which will score a modest profit from the deal.
Under the terms of the merger, which is supported by the holders of 42% of MSL's stock, the target's shareholders will receive 0.375 voting shares of Celestica for each MSL share.
With Celestica's shares closing in New York at $17.69 on Tuesday, the deal values each MSL share at about $6.63 — an 18% premium over the stock's $5.60 closing price Tuesday.
Celestica said it may adjust the share-exchange ratio to ensure that MSL shareholders will receive between $6 and $7.25 a share. Moreover, the holders of MSL Series A and Series B preferred shares can receive $52.50 a share, plus accrued dividends. Series B preferred shareholders can also receive a "make-whole" payment of $2.25 per share in either cash or shares.
DLJ invested about $75 million in Manufacturers' Services common stock from 1995 to 2000, Securities and Exchange Commission filings indicate. DLJ recouped $24.5 million in Manufacturers' Services IPO three years ago through share sales.
In MSL's merger with Celestica, DLJ will swap its remaining 16.2 million common shares for Celestica stock worth between $97 million and $118 million.
In addition, last year DLJ invested about $15 million in Manufacturers' Services preferred. It will earn a $1 million to $2 million profit on its preferred.
CSFB's Thompson Dean, a member of Manufacturers' Services' board of directors, did not return a call seeking comment.
Both companies' boards have approved the deal, but it still hinges on acceptance by competition regulators and MLS shareholders.
Celestica CEO Eugen Polistuk said Wednesday that the deal carries a breakup fee but would not disclose its value.
Manufacturers' Services was advised by Boon Sim and Amr El-Shaer of Credit Suisse First Boston and Marshall Sonenshine and Carlo Bronzini Vender of Sonenshine Pastor & Co. LLC.
Celestica had legal counsel from Joel Greenberg and Lynn Fisher of Kaye Scholer LLP. The company's financial advisers were not known at press time.
Celestica said the deal will allow it to expand its manufacturing capabilities and product lines, adding that it is buying a company with recognized strengths in making electronic hardware.
Still, some analysts questioned the wisdom of the deal during a conference call with both
companies' CEOs Wednesday morning, given that both Celestica and MSL are major suppliers to IBM and Hewlett-Packard Co., and neither is operating at capacity.
Celestica's Polistuk said the company had made it clear that acquisitions would remain part of its strategy, even as it continues to cut jobs and close plants.
Polistuk said in July after reporting a second-quarter net loss of $39.6 million that Celestica remained "open to selective acquisitions."
During the conference call, Polistuk also said the deal will result in further rationalization,
but he did not elaborate.
By the end of this year, Celestica will have slashed overall capacity by about 40% through its restructuring, which will cost more than C$400 million ($302.3 million) in charges. The company announced in July 2002 that it was cutting 6,000 jobs, or 15% of its work force.
Celestica has also diversified its business by expanding into areas other than information technology or communications, but its biggest customers, such as IBM and HP, still make up the bulk of its revenue.
Analyst Jeff Rath with Canaccord Capital in Toronto said Wednesday the logic of combining two electronic manufacturing services, or EMS, companies that have plants operating below capacity may be flawed.
"EMS consolidation ended in miserable failure in the industry overall in the past few years," he said. "One of the concerns is that Celestica is now buying a competitor, but it doesn't appear that they're completely out of the tunnel from their own restructuring, so it never makes sense when you're closing facilities and acquiring facilities at the same time."
Indeed, three weeks ago, Milpitas, Calif.-based Solectron Corp., which is Celestica's main U.S. competitor and has spent billions of dollars on acquisitions over the last few years, said it is selling assets for pennies on the dollar.
Rath conceded, however, that the MSL deal may precede a turnaround for Celestica, which, unlike its U.S. rivals, had refrained from purchases during the recent market turmoil.
"It's an all-stock deal, so Celestica is probably sending a signal that their next quarter will be better than expected," he said. "But the immediate impact to the business is hard to see, and we still think that the industry is not finished its rationalization process."
Celestica's last big acquisition was the C$890 million takeover of Omni Industries Ltd. of Singapore in 2001, which followed the C$265 million purchase of Primetech Electronics Inc. of Kirkland, Quebec.
In a statement before markets opened Wednesday, Celestica said that MSL has 34.4 million common shares and about 1.33 million outstanding preferred shares. As of June 29, the company had a net cash balance of $25.5 million.