AO Smith to Buy Rival Lochinvar for $418 Mln

BANGALORE (Reuters) - A.O. Smith Corp (AOS.N) will acquire privately held rival Lochinvar Corp for $418 million in its biggest deal so far to expand and strengthen its presence in the global water heating market. Shares of AO Smith rose almost 11 percent after the news of the company's first buy since it agreed to sell its motor business last December to focus on water heating products. "The North American boiler opportunity is a logical expansion of our core water heater business, and Lochinvar's product offering is highly complementary to our current product lines," CEO Paul Jones said on a conference call with analysts. Lochinvar makes boilers used in commercial and residential hydronic heating and hot water applications. For the 12 months ended June 30, it generated sales of about $200 million. AO Smith expects the deal to add to its earnings by 10 cents per share in the fourth quarter, excluding one-time transaction charges, and 40-50 cents a share in 2012. AO Smith will not assume Lochinvar's current debt, but will pay an extra $35 million to its private shareholders if certain revenue objectives are met by November 2012. In December, AO Smith had decided to sell its electric motor business to Regal Beloit Corp (RBC.N) for about $875 million. With the sale, the company essentially exits the electric motor business to focus solely on residential and commercial water heating equipment and water purification equipment. The sale is yet to close as U.S. antitrust regulators have asked more information from the companies. It was initially expected to close in the first half of 2011. Other than Lochinvar, AO Smith's U.S. competitors include Rheem Manufacturing Co and Bradford-White Corp. Its primary Chinese rival is Haier Appliances. Earlier on Tuesday, AO Smith posted better-than-expected second-quarter results but narrowed its 2011 earnings outlook citing weak sales of some products in China and North America after posting higher second quarter numbers. The company said sales of higher-efficiency products in North America were not as strong as its expectations as some tax incentives were reduced earlier this year. Sales of water treatment products sold through the Chinese wholesale channel were lagging, it said. On the conference call, CEO Jones also said the company was cautious of its outlook because of steel costs. Jones continues to expect China water heater business to grow at a rate of 2-3 times the country's GDP. AO Smith has been betting on China and India to grow rapidly as weakness in the U.S. residential and commercial construction markets continues. CEO Jones said about $275 million of the proceeds from the sale of motor business will be used for acquisitions in emerging economies. AO Smith plans capital spending of $65 million for 2011 and about one-third of it will be used for capacity expansion in China. Shares of Milwaukee, Wisconsin-based AO Smith were up $2.67 at $43.04 in midday trade on Tuesday on the New York Stock Exchange. They touched a high of $44.73 in the morning session.

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