FTC puts Graco closer to Illinois Tool deal

Some of the business units likely will be sold after the acquisition to satisfy federal antitrust concerns.

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Graco CEO Patrick McHale

Photo: David Joles, Star Tribune

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Graco Inc., the paint-sprayer and grease-gun manufacturer, has reached a conditional agreement with the Federal Trade Commission that clears the way for the company to close its $650 million acquisition of a competitor's finishings business next week.

The deal, depending upon how much of the target businesses of Illinois Tool Works (ITW) that Graco is allowed to keep, will push Graco well over $1 billion in annual revenue this year and boost profitability significantly over the next several years, analysts say.

The FTC had challenged the acquisition, which gets Graco into the powder-finishings business. It's unclear how much of ITW's liquid-based business it will be allowed to keep, particularly in the U.S. market, where the two are market leaders.

The FTC on Tuesday issued an order requiring Graco, a significant exporter of fluid-handling equipment, to "hold separate" the worldwide liquid-finishing equipment businesses of ITW while allowing Graco to complete the purchase of all of ITW's finishing equipment businesses. It is likely some units of the combined company will be sold to comply with the FTC's order. The agency challenged the year-old deal on anti-competitive grounds in December 2011 and the parties commenced a legal battle.

Graco shares closed up 1.7 percent to $52.82 after Tuesday's announcement of the conditional approval. The company, which had postrecession record earnings of $142 million on revenue of $895 million in 2011, has seen its stock rise from $32 per share last October to more than $54 recently.

Bill Frels, veteran portfolio manager at St. Paul-based Mairs & Power Investments, which has been an investor in Graco since the 1970s, said Graco management is betting that it can raise the ITW Finishings profit margins to the higher level of Graco's, which could add millions to the bottom line over time.

"If they bring the margins of this acquisition up to the average of the Graco company, it would be a significant potential boost to earnings over the next two or three years,'' Frels said. "It also will strengthen them internationally."

The Star Tribune reported March 20 that the FTC had temporarily set aside an administrative law case against the deal, which is usually an indication that the two parties are talking about modifications that could result in sales of certain assets to ensure the consolidated operation doesn't dominate one or more product lines.

The government had alleged that the combined Graco-ITW Finishings business would dominate the manufacture of electric-circulating liquid paint pumps for factories.

Under the FTC order, Graco can complete its acquisition, but must hold and operate separately under existing management all of the worldwide ITW liquid finishing equipment businesses. They operate under the Binks, DeVilbiss, Ransburg, and BGK brand names.

During the hold-separate period, which was not specified, "FTC staff will more fully analyze the appropriate scope of divestiture and other relief needed to remedy the anti-competitive effects of the acquisition, as alleged in the FTC's complaint," the FTC said in a statement. That will be followed by the staff recommendation to FTC commissioners.

"We are looking forward to moving this transaction on to the next phase, although the final structure remains under consideration and will be impacted by requirements imposed by the FTC," Graco CEO Patrick McHale said in a news release. McHale said the deal will close Monday.

The government will allow ITW's Gema powder-finishing business to be absorbed into Graco. That constitutes about a third of the sales and profits of the ITW finishings brands. The government is requiring the that the liquid-finishing assets "remain viable and marketable until the necessary assets can be divested."

McHale said ITW's total liquid-and-powder finishing businesses generated record 2011 operating earnings of $80 million on near-record sales of $375 million.

Graco has a market value of about $3.2 billion and 2,300 employees. ITW is an industrial conglomerate valued at about $20 billion, with hundreds of business units and 60,000 employees worldwide making an array of industrial products.

Neal St. Anthony • 612-673-7144

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