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Prysmian finds sparky US fix for dim cable outlook

Cable maker Prysmian is once again in expansion mode. Six years after swooping on General Cable, the acquisitive $15 billion manufacturer of electric wires and fiber connections has agreed, to buy smaller US rival Encore Wire for about $4.2 billion. The deal does not come cheap. Yet a stronger presence in the larger and more attractive North American market should provide a sparky antidote to the cable sector’s slightly dimmer outlook.

Designated CEO Massimo Battaini is not wasting time. The Italian executive, set to formally replace long-standing boss Valerio Battista this week, is following in his predecessor’s footsteps by purchasing a US cable manufacturer which services residential areas and data centres. Under the deal terms, unveiled on Monday, Prysmian has agreed to pay $290 in cash for each Encore Wire share, roughly 11% above Friday’s closing price. That’s equivalent to $4.2 billion once Encore Wire’s $560 million cash pile is accounted for.

The seller is charging a steep price. At 11.5 times the $370 million of EBITDA analysts expect Encore Wire to deliver in 2024, the bid price values the company significantly above the 9 times average of the European cable segment.

Still, savings look to be more than compensating for the higher valuation. Prysmian expects to add 140 million euros to its annual EBITDA following the acquisition. Assuming the Italian group can deliver on its promise and stripping out an estimated 40 million euros for depreciation, the total boost should equate to nearly 800 million euros once taxed at the target’s 23% tax rate and capitalised, Breakingviews calculations show. That’s higher than the around $500 million premium the Italian company is paying. Prysmian’s share jump of 7.5% on Monday, a 1 billion euro boost to the market cap, suggests investors are even more bullish.

There are caveats. Booming demand seen in 2021 and 2022 for electric cables, essential to the world’s energy transition, considerably slowed in 2023. That led to lower revenue at Prysmian and peers.

Yet analysts believe the sector may have bottomed out. Expanding into the US, which would generate more than 50% of combined EBITDA, will also have its advantages. The market is less fragmented than Europe’s and creaky US distribution grids need an upgrade. Encore Wire’s EBITDA margin of 20% of revenue, twice Prysmian’s, and its presence in data centres are also attractive. By doubling down on the US, Prysmian may be able to re-ignite its electrification journey. Reuters

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