Business Transaction: WTC INDUSTRIES, INC. (WTCO:OTC)

1000 Apollo Road
Eagan, Minnesota 55121-2240

Background
Prior to its purchase in May 2004, WTC Industries (WTC) engaged in the manufacture of water filtration systems and replacement filters serving the point-of-use potable water market. WTC's customer base consisted primarily of Original Equipment Manufacturers (OEMs). The company's products were marketed under the brand name "PentaPure."

In the years leading up to its sale, the company had grown significantly with respect to sales, posting a compound annual growth rate from 1999 to 2003 of over 50%, moving from $5.1 million to $28.3 million. For the twelve months ended April 2, 2004, the most recent date for which financial information had been filed with the Securities and Exchange Commission prior to the sale, WTC generated revenues of approximately $34 million.

As revenues increased, profitability also improved, with the company's operating profit before taxes increasing from net losses in 1998 through 2000 to returns of 16.1% and 15.7% in 2002 and 2003, respectively. Increasing profitability resulted in an improvement of the company's equity position from a negative $5.5 million in 1998 to a positive $6.2 million in 2003.

The company's stock price enjoyed a considerable increase as well. In the first quarter of 2002, bid prices for the company's stock had a range of $4.00 to $8.71 per share. As the company's financial performance continued to improve, the bid prices also increased yielding a range of $17.20 to $29.50 per share in the first quarter of 2004.

The Transaction
The purchaser of WTC, a Meriden, Connecticut based firm called Cuno, Inc., is a manufacturer of filtration and purification systems for liquids and gases. In its most recently completed fiscal year prior to the purchase of WTC, which ended October 31, 2003, Cuno had revenues of $288 million.

According to Cuno's 10-K filing for the year ended October 31, 2004, the company paid approximately $115 million for WTC. At the time of the transaction, WTC had approximately 1.9 million shares outstanding, which would indicate a purchase price of about $60.00 per share. This per share purchase price was essentially double the highest bid price in first quarter of 2004.

Using WTC's financial data for the 12 months ended April 2, 2004 and the $115 million purchase price paid by Cuno, valuation multiples can be calculated. The salient multiples are presented below:
Price to Pretax Profit Multiple 20.95
Price to Equity Multiple 14.60
Price to Assets Multiple 5.25
Price to Revenues Multiple 3.40

Interpreting the Data
According to Cuno's 10-K filing, of the $115 million purchase price, the company attributes $73 million to goodwill and $28 million to intangible assets. Furthermore, the valuation multiples resulting from the transaction are extremely high. These two factors point to the fact that Cuno's purchase of WTC was most likely a combination of synergy (the purchaser augmented an existing division) and financial motivation (WTC performed well in the years leading up to the acquisition). Cuno's 2004 annual report cites two primary reasons for the WTC acquisition. First, the purchase was intended to help solidify Cuno's position in the point-of-use water filtration industry at the OEM level. Second, Cuno believes, that through the purchase of WTC, it will be able to capitalize on an existing relationship between WTC and one of its major customers, thereby gaining a stronger position in the retail segment of the industry.

It is clear that Cuno purchased WTC, at least in part, for synergistic purposes. A financially motivated buyer would not have purchased the company for such large multiples. The company would not generate enough earnings to cover the purchase price for at least 21 years after the sale, which is too long for most financial buyers. This suggests that the price paid for WTC was not necessarily fair market value, the value borne out in the marketplace by a willing buyer and willing seller; but rather an investment value or strategic value, which is the value of the company to a particular individual (or organization) who benefits from economies of scale resulting from the acquisition. This point is further demonstrated by the fact that bid prices for the company's stock were between $17.20 to $29.50 per share only months prior to the purchase. In comparison, Cuno purchased the company for approximately $60.00 per share.

Income Statement & Equity Summary (In Thousands)

Historic Bid Prices for Companystock

Back To Top