G&K Services Acquisition A Multi-Year Catalyst For Cintas

The acquisition of G&K Services Inc GK would extend Cintas Corporation’s CTAS already leading growth profile, Baird’s Andrew J. Wittmann said in a report. He upgraded the rating on Cintas from Neutral to Outperform, while raising the price target from $111 to $140.

The purchase price for G&K Services represents a 19 percent premium. Management expects the deal to be completed in four to six months and for it to be GAAP accretive in year two. The transaction is pending shareholder approval and regulatory clearance.

Multi-Year Growth

The integration of G&K Services offers Cintas a multi-year opportunity, “somewhat reducing cyclical-induced risk, in our view, with CTAS now commanding greater control of fundamental earnings power,” Wittmann commented.

The cost synergies expected could prove to be conservative. They are estimated at ~13-14 percent of G&K Services’ revenue, which brings them in-line with the ~10-15 percent industry precedent. The analyst noted, however, that G&K Services’ public-to-public terms and the sheer size of the company suggest higher synergies.

“Faster-than-expected cost realization (four-year target) and/or size of benefit are sources of upside,” the Baird report stated.

G&K Services offers new growth channels. After the acquisition, 170,000 new customers would benefit from Cintas’ large range of service offerings. “An exceptionally strong sales culture and recently invigorated marketing efforts provide conduits,” the analyst wrote.

Cintas would likely generate an EPS CAGR of ~20 percent through F2020, with widening competitive advantages and margins versus peers.

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