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Cintas Corp. (CTAS) looks to grow with $2 billion acquisition

G&K services would add $1B in revenue
Posted at 11:13 AM, Aug 16, 2016

CINCINNATI -- Cintas Corp. announced the $2.2 billion acquisition Tuesday of G&K Services Inc., a Minnesota-based uniform rental company that specializes in health care apparel and first-aid equipment.

The deal would create a uniform company with more than 1 million customers, reducing the companies’ combined costs by up to $140 million a year within four years.

Cintas investors reacted favorably to the news, with shares rising 7 percent to $115.26. G&K shares were up 18 percent to $97. Cintas said the deal is based on an enterprise value of $2.2 billion. The purchase price of $97.50 per share suggests a transaction value of $1.93 billion, as G&K has 19.8 million shares outstanding. Cintas said the deal includes the assumption of up to $250 million in G&K debt.

The transaction is subject to approval by G&K shareholders and antitrust regulators. The purchase price of $97.50 per share represents a 19 percent premium to the Aug. 15 closing price of G&K shares.

“Cintas’ management team and board of directors have a deep level of respect for G&K Services,” said Cintas CEO Scott Farmer in a news release. “Our companies share a dedication to customers, employees-partners and shareholders, which will build a great foundation for a successful combination.”

Scott Farmer

Cintas has been growing as its clients put more people back to work following the recession. The company grew revenue nearly 10 percent to $4.9 billion in its fiscal year that ended May 31. Profits rose 11 percent to $457 million.

G&K earned a $59 million profit on revenue of $938 million in its most recent fiscal year last June.

This is the second acquisition since last summer for Cintas, which purchased ZEE Medical for $130 million in a deal that closed earlier this year.

Chief Financial Officer J. Michael Hansen hinted that more deals were coming, when the company briefed analysts on its fourth-quarter earnings in July.

“We would look for acquisitions in our rental business and our first-aid and safety business, in our fire businesses primarily,” Hansen said. “We love tuck-in acquisitions, they are very accretive. And we'll continue to look aggressively for those kind of opportunities, provided they're at the right value. We might look for bigger opportunities in any of those businesses, again, as long as they provide long-term value for us and at the right valuation.”

Cintas has long been known as a consolidator in the uniform-rental industry, acquiring smaller competitors and buying its way into new markets like fire safety, carpet cleaning, fire protection and facility services.

But Cintas executives told analysts Tuesday that its latest purchase is about increasing “route density” in cities across the country. That lets its drivers, who double as sales reps, spend more time with customers and less time driving between deliveries.

The goal is to penetrate larger cities the way Cintas has grown in Cincinnati, said Cintas Vice President Paul Adler, cross-selling fire protection and other services to customers who hire Cintas to provide and clean uniforms.

“We're dense in Cincinnati because it's our headquarters, but we have opportunity to add plants to and be larger in the major markets across the country like New York and L.A. and Chicago,” Adler said. “That's what we plan to do. That's the future, to increase that density to increase our operations per population like we have here in Cincinnati and this acquisition certainly helps us achieve that.”