BREAKINGVIEWS-Workwear peddler models post-inflation M&A look

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jonathan Guilford

NEW YORK, Jan 10 (Reuters Breakingviews) - It’s time to suit up for some post-inflation M&A. Cintas CTAS.O, which supplies workwear for everyone from nurses to mechanics, disclosed an unsolicited $5.3 billion offer for smaller rival UniFirst UNF.N. The aggressive move follows a rare setback fanned by fears that its pandemic-boosted pricing power is waning. Market leaders in other industries are likely to copy the look.

Renting and washing scrubs and coveralls is a business Cintas wears well. The enterprise was recently trading at 30 times expected EBITDA for the ensuing 12 months, according to Visible Alpha data, while peers such as UniFirst and Vestis VSTS.N fetched just 10 times. The 23% operating margin Cintas wrung out of its most recently reported quarter also towers over UniFirst’s 9%, and its revenue is expected to rise 7% this year, compared to the usual 2% industry-wide, Morgan Stanley analysts estimate.

Minor stains are beginning to show, however. Growth has slowed since Cintas’ booming fiscal year ending in May 2023, when sales increased 12% from the previous annual stretch. Boss Todd Schneider noted in December that hiking prices is harder “as inflation has come down,” and the company narrowly lowered the high end of its growth guesstimate. UniFirst CEO Steven Sintros has expressed similar expectations.

Another way to spruce up the numbers would be an acquisition. French rival Elis ELIS.PA cracked open the possibility, saying in October that it had held unsuccessful takeover talks with both UniFirst and Vestis. Cintas then approached UniFirst with a bid of $275 a share in November. Despite the 62% premium, the offer was spurned.

Cintas first approached UniFirst, where the Croatti family controls 70% of the vote with super-voting shares, nearly three years ago. If the market is getting tougher now, however, its advantages loom larger. The suitor says it can slash $375 million of annual costs once combined with UniFirst, whose own efforts to improve profitability rest on an IT overhaul that won’t show up until 2028, Baird analysts reckon.

Despite the Croatti recalcitrance, Cintas can dress up the cash entreaty, including by offering shares to give UniFirst owners a portion of the synergies. Taxed at the standard 21% U.S. corporate rate and capitalized, they’re worth nearly $3 billion. The sum exceeds the $2 billion premium, giving Schneider some wiggle room. He may need even more to account for antitrust risk. Whether or not this blue-collar outfitter deal succeeds, white-collar executives everywhere will be seeking deals to iron out their own inflation and growth wrinkles.

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CONTEXT NEWS

Cintas, which sells and cleans workplace uniforms, said on Jan. 7 that it had submitted a cash offer to buy rival UniFirst for $275 a share, or $5.3 billion, adding that it first offered $255 in February 2022.

UniFirst confirmed it had rejected the offer, which it described as “highly conditional,” after hearing from some of its largest shareholders by voting power. The Croatti family has 70% control of the company through its super-voting Class B shares.

(Editing by Jeffrey Goldfarb and Pranav Kiran)

((For previous columns by the author, Reuters customers can click on GUILFORD/
Jonathan.Guilford@thomsonreuters.com))