CCelestica Inc. will buy Silicon Valley-based light-display equipment maker Impakt Holdings LLC for US$329-million, giving the Toronto-based engineering and manufacturing firm greater presence in South Korea and a slice of the growing “organic” LED light-display market.
Announced on Wednesday morning, the acquisition fits into Celestica chief executive Rob Mionis’s previously announced plans to boost operating margins with acquisitions; the company had also announced in January that it would buy the aerospace manufacturing company Atrenne Integrated Solutions Inc. for US$139-million.
An IBM Corp. offshoot that was spun out into a public company by Onex Corp. in the late 1990s, Celestica spent more than $2-billion on 36 acquisitions under Onex’s control before taking steps to control costs. After a few years in the doldrums, Celestica returned to growth after Mr. Mionis became CEO in 2015. It brought in US$6.1-billion in revenue in the 2017 fiscal year ended Dec. 31, up 2 per cent from the year before.
As a manufacturer, Celestica serves customers in a wide range of industries including aerospace, defence, communications and health tech – and, in the case of the Impakt acquisition, capital equipment to strengthen customers’ supply chains, including in the semi-conductor market.
Analysts cheered the Impakt deal as a boost for Celestica’s revenue mix. Celestica’s jumped up as much as 7.2 per cent Wednesday, but closed at US$10.03, up just 0.6 per cent on the New York Stock Exchange.
The Impakt purchase will bring 450 employees and South Korean manufacturing capabilities into the company while expanding Celestica’s capital-equipment capabilities into light-display technology, including in the growing organic LED, or OLED sector.
OLED screens are starting to appear in a number of consumer devices such as TVs and Apple Inc.’s newest line of iPhones. A report last year from Markets and Markets forecast that the global OLED market would have a compound annual growth rate of 15.2 per cent between 2017 and 2023, with an expected value of US$48.81-billion by then.
“I just bought my first OLED TV in celebration,” Mr. Mionis said in a phone interview. “The market is moving to OLED displays.” He said the company admired the 10-year-plus life cycle of OLED- and LCD-display manufacturing equipment.
In a conference call with analysts, chief financial officer Mandeep Chawla said the deal would be financed by the company’s revolving line of credit as well as term loans. The company hopes to generate a return greater than its cost of capital within three years of the acquisition, he said.
The company also increased its 12- to 18-month operating-margin target range to between 3.75 per cent and 4.5 per cent, from between 3.5 per cent and 4 per cent, citing continuing restructuring initiatives, a review of its cloud portfolio and the growth of its advanced-technology portfolio.
Analyst Gabriel Leung of Beacon Securities changed his rating on the stock to “buy” from “hold” on Wednesday, keeping his target price at US$13. “Combined with CLS’ improving margin profile and stronger book of business, we view the shares as representing a compelling buying opportunity,” Mr. Leung wrote in a research note. RBC Dominion Securities’s Paul Trieber, meanwhile, wrote that the acquisition “accelerates the company’s shift towards the high-margin [advanced-technology solutions] segment.”
In an interview, Thanos Moschopoulos of BMO Capital Markets said that the only drawback is that the broader semiconductor market, which includes LEDs, has had a slowdown in the second half of that year. “Is this just a temporary slowdown or the beginning of a longer, cyclical slowdown that will continue into ’19? We don’t’ know the answer yet,” he said.
Celestica, Mr. Moschopoulo continued, “have said they think they can offset market weakness by getting more market share. But the question is, are they increasing their exposure to semi- equipment at a time when the market is experiencing a slowdown?”
The company expanded its deal team to four or five shortly after Mr. Mionis’s arrival, he said, and is actively seeking deals that bolster Celestica’s current business lines. At any given time, the team is looking at a “handful” of deals among a “universe” of opportunities.
“We’re not looking for a big bang,” he said. “We’re looking for capability and bolt-ons and things to drive our value proposition.”
Mr. Mionis said he admired Impakt’s vertical integration – from engineering to sheet-metal anodizing – and that the acquisition could support other verticals in Celestica’s capital-equipment business line while helping localize more manufacturing in South Korea.
With a report from Sean Silcoff
Josh O’Kane