| NEW YORK
NEW YORK SPX Corp SPW.N is in exclusive talks to buy rival Gardner Denver Inc GDI.N and hopes to finalize a deal by the end of the year, four people familiar with the matter said, in a merger that could create an industrial machinery conglomerate with a market value over $7 billion.
Gardner Denver told private equity bidders KKR & Co LP (KKR.N), Advent International and a consortium of TPG Capital LP and Onex Corp OCX.TO to put their pencils down until January while it negotiates a deal with SPX, the people said on Monday on condition of anonymity because discussions are confidential.
With a market value of about $3.5 billion, SPX is of similar size to Gardner Denver, which has a market capitalization of $3.35 billion. SPX could use both cash and its own shares to pay for a deal and has reached out to banks for financing to support the cash element of its offer, one of the people said.
Private equity firms, which invest money in buyouts on behalf of major institutional investors such as pension funds and insurance firms, would have been expected to pay Gardner Denver shareholders all cash to take control of the company.
Gardner Denver, SPX, KKR, TPG and Advent declined to comment, while Onex did not immediately respond to a request for comment.
Gardner Denver said on October 25 that it was pursuing strategic alternatives, including a sale of the company, after Reuters reported it had asked its financial adviser, Goldman Sachs Group Inc (GS.N), to solicit buyout offers.
Last week, SPX said it had completed the sale of its service solutions business to Robert Bosch GmbH for expected net proceeds of about $1 billion, exiting its roots in the car industry to focus on growing its flow technology segment.
SPX Chief Executive Chris Kearney has worked over the past few years to focus the company on its flow control business, which makes equipment used to produce liquids ranging from petroleum to dairy products.
"Even with roughly $1 billion of proceeds expected from the sale of service solutions, SPX would still need to tap the financial markets to finance the acquisition," Deutsche Bank analysts wrote in a December 3 note, cautioning that a deal with Gardner Denver would present a significant financial strain for SPX.
Charlotte, North Carolina-based SPX also makes electrical transformers and cooling towers for power plants, and has been adding and selling businesses to focus more narrowly on becoming a flow technology company.
Gardner Denver's decision to explore a sale follows months of pressure from activist investor ValueAct Capital LLC since it acquired a roughly 5 percent stake.
The shareholder campaign followed the sudden resignation of Chief Executive Barry Pennypacker in July and his interim replacement by Chief Financial Officer Michael Larsen, who last month was appointed as permanent CEO.
The company has grappled with lower demand for petroleum and industrial pumps, which pressured its engineered products group. That group reported a 20 percent drop in revenue in the third quarter.
The deal could face potential objections from shareholders on both sides. Gardner Denver investors will likely scrutinize the circumstances that prompted the company to snub private equity in favor of SPX, particularly if an offer has a significant stock element.
Gardner Denver canceled management meetings scheduled with buyout firms this week and did not even seek final offers before turning to SPX for one-on-one talks, the sources said.
SPX shareholders, who are likely to see the value of the shares drop if a deal goes through, will ask for evidence of synergies between the two industrial firms. They could also scrutinize executives for their change-in-control severance agreements that cover mergers where shareholders control less than 80 percent of the new entity.
The flow technology industry, in which SPX competes with rivals such as Pentair Ltd (PRN.N), Flowserve Corp FSL.N, Xylem Inc (XYL.N) as well as giant industrial conglomerates such as General Electric Co (GE.N) and Siemens AG (SIEGn.DE), has seen robust merger activity this year.
Pentair, which makes pumps and filters used in everything from municipal water systems to beverage production, reached a $4.6 billion stock deal in April to absorb Tyco International Ltd's TYC.N flow-control business, roughly doubling Pentair's size and making it the largest player in its sector.
In July, Carlyle Group LP (CG.O) and BC Partners Ltd agreed to pay $3.46 billion for United Technologies Corp's (UTX.N) Hamilton Sundstrand industrial businesses, which makes pumps and compressors.
(Reporting by Greg Roumeliotis and Soyoung Kim in New York; Editing by Bernard Orr and Ken Wills)