Vertiv Makes $2 Billion Acquisition, Warns of Supply Chain Challenges

When it went public last year, Vertiv said it expected to grow through M&A. Today it made good on that promise, buying power distribution specialist E&I Engineering Ireland and its affiliate Powerbar Gulf for about $2 billion.

Vertiv executives said the deal will fill gaps in its power portfolio, will boost the market for its products by as much as $7 billion, and expands its presence in markets like the Middle East.

The E&I announcement was accompanied by a warning about mounting problems in the supply chain for data center equipment, which prompted Vertiv to lower its sales guidance for the third quarter by $50 million. Vertiv said shortages were expected to last through the first half of 2022.

“Despite continued strong market demand, supply chain challenges are trending worse than expected, with critical part shortages driving the need for additional spot buys,” Vertiv said. ” In some cases, the company cannot procure critical parts at any price, creating production and delivery challenges pressuring the top-line.”

Shares of Vertiv (VRT) were about 6.5 percent lower in late morning activity on the New York Stock Exchange, trading at $26.19 a share, down $1.85. Vertiv stock has doubled in price since its debut on the NYSE in February 2020.

Expanding Switchgear and Busway Portfolio

Vertiv said E&I brings additional switchgear and busway product, providing the combined company with the ability to manage a customer’s entire power infrastructure as an integrated system.

“The acquisition of E&I represents a key milestone in Vertiv’s strategy, completing our portfolio of in-building power train offerings for data centers and vital commercial and industrial markets,” said Rob Johnson, Vertiv’s Chief Executive Officer. “Our companies share a strong culture of engineering excellence and innovation and a passion for serving our customers with differentiated products and service.”

E&I Engineering makes electrical switchgear and power distribution systems, including “unique in-house integrated power solution designs and technology tailored to individual client project needs.” The company was founded in 1986 by Philip O’Doherty, and operates in 30 countries, with annual sales of approximately $460 million (2021E) and 2,100 employees, Vertiv said E&I’s products compete in an addressable market of about $7 billion, which is expected to grow 5% annually through 2025.

“We are excited to join the Vertiv team and to continue to grow our business through Vertiv’s global reach, strong channel presence and great customer positioning in critical digital infrastructures,” said O’Doherty, founder and Chief Executive Officer of E&I.

Vertiv will pay approximately $1.8 billion in upfront consideration, with the potential for up to $200 million in cash based on hitting 2022 profit milestones. The upfront consideration consists of $1.17 billion in cash and $630 million of Vertiv common stock. The deal has been unanimously approved by Vertiv’s Board of Directors and is expected to close in the fourth quarter of 2021.

Growing Through M&A, But Shopping Carefully

Vertiv has gained investor favor as a public company squarely focused on the growth of data centers – a rare “pure play” in the industrial equipment sector. That’s significant at a time when the world’s largest investors are targeting digital infrastructure, citing extraordinary demand for capital to fuel the shift to a data economy.

The Vertiv brand is only four years old, but has a long history with the data center industry’s most familiar names, especially the Liebert line of power and cooling products. The company went public last year when it was acquired by a SPAC (special purpose acquisition corporation) affiliated with Goldman Sachs, with renowned investor David Cote as its new executive chairman.

The deal took the company public, with Vertiv seeing an opportunity to become a platform for acquisitions, describing the data center equipment sector as a “fragmented industry with opportunities for bolt-on M&A.” With strong investor interest in digital infrastructure assets, Cote indicated that the Vertiv team has shopped carefully.

“While this deal marks the first acquisition by Vertiv since becoming a public company, our team has thoughtfully followed acquisition best practices during the process of identification, valuation, due diligence and integration planning,” said Cote. “E&I represents a unique opportunity for Vertiv and it fits well in the Vertiv portfolio. I am excited about the potential of these two great businesses coming together as one.”

Supply Chain Challenges Impact Price, Availability

Vertiv’s warning about growing supply chain woes will gain the attention of the data center industry. As a public company, has been providing regular updates about supply chain challenges since the beginning of the COIVID-19 pandemic.

In the most recent earnings call in July, Johnson said Vertiv was paying higher prices for materials, particularly in “spot buys” to procure hard-to-get equipment, including single-phase UPS units and rack-mount PDUs. The company was also paying more in freight costs, especially for expedited shipping to meet timelines amid congestion on key shipping channels between the US and Asia.

In today’s update, Vertiv said supply chain challenges were “trending worse than expected,” with critical parts shortages driving more spot buys. But the most problematic news was Vertiv’s comment that “in many cases, parts are not available at any price” – which suggests that shortages can’t be addressed by paying a premium to obtain a scarce item.

Vertiv said it will likely fall a bit short of 2021 pricing targets, particularly in the Americas, but said the temporary shortages set the stage for a “tailwind” in 2022. The supply chain issues come amid robust demand, as orders in July and August were up approximately 12% compared to the same period last year, driven by continued strength in cloud and colocation markets. Vertiv had a record backlog of about $2.4 billion at the end of August, a 30% increase from year-end 2020.