Ladies and gentlemen, thank you for standing by. Welcome to the Megger Group Limited Acquisition Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw the question, please press star one one again. Please be advised that today's conference is being recorded. On the call today is Bryan Sayler, President and CEO, Chris Tucker, Senior Vice President and CFO. I would like now to turn the conference over to the first speaker today, Kate Lowrey, Vice President of Investor Relations. Kate, you may begin.
Thank you. Statements made during this call regarding management's expectations for Q2 fiscal 2026 revenue, GAAP EPS, and adjusted EPS, as well as future growth strategy, expectations, beliefs and benefits resulting from the acquisition and other statements which are not strictly historical, are considered forward-looking statements within the meaning of the safe harbor provisions of the federal securities laws. Investors are cautioned that such statements are only predictions and speak only as of the date of the release, and the company undertakes no duty to update them except as may be required by applicable laws and regulations. There is no assurance that the acquisition will be consummated, and there are a number of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements made herein.
The results and uncertainties in connection with such forward-looking statements related to the acquisition include, but are not limited to, the ability and timing to consummate the acquisition, including obtaining the required regulatory approvals and financing to fund the acquisition. ESCO's ability to promptly and effectively integrate the acquired business after the acquisition is closed, and ESCO's ability to obtain expected cost savings and synergies of the acquisition, operating costs, customer loss, and business disruption, including difficulties maintaining relationships with the employees, customers, or suppliers of the acquired business that may be greater than expected following the consummation of the acquisition. Other risks and uncertainties described in Item 1A. Risk Factors ESCO's annual report on Form 10-K for the fiscal year ended September 30, 2025. Now, I'll turn the call over to Bryan.
Thanks Kate, and thanks everyone for joining the call today for this exciting transaction. To get started, I want to thank the many team members on both sides of this transaction who have worked diligently through a rigorous process to get us to this point. We're excited to be here today to provide insight on this proposed acquisition. ESCO and our board of directors feel strongly that this transaction meets all of our stated M&A objectives and will create shareholder value by adding scale and meaningfully expanding our product portfolio, serving utility customers worldwide. I'm very happy to welcome the great team at Megger to ESCO. I can tell you that Megger has been close to the top of our list of M&A targets for the better part of a decade, and I am very proud to be bringing it into our portfolio.
Megger is one of very few scaled global platforms in electrical test and measurement, with 130-year history and brand heritage and deep customer relationships with utilities and industrial operators worldwide. Assets of this quality, scale, and strategic fit rarely come to the market. We strongly believe in the compatibility of our cultures and the strategic fit with our overall portfolio. The Utility Solutions segment and Doble in particular, these are two highly complementary brands across multiple fronts, products, services, and geographic exposure, and combining them creates a strong global franchise providing key products and services to a customer base that very much needs partners like Doble and Megger to help them get the most from their assets in the coming decades. We have a chart presentation available on our website to accompany our remarks, and I'll get started with slide number three.
Adding Megger to the ESCO portfolio expands our capabilities as a valued partner to utilities worldwide. Megger is a leading provider of electrical test, monitoring, and software solutions with integrated offerings that span the full utility maintenance life cycle. They have a long track record of serving blue-chip customers and delivering strong financial performance. Adding Megger expands our technology portfolio, serving markets with secular tailwinds, and creates meaningful synergy opportunities and positions us to accelerate growth in our Utility Solutions segment. This combination provides complementary utility solutions capabilities when paired with our existing Doble business and adds important scale to a core ESCO business. Let's move to the next chart and I'll take you through the deal metrics. The purchase price is $2.35 billion for the business, consisting of a little more than $900 million in cash.
$900 million in cash and ESCO equity valued at approximately $1.4 billion. The cash portion will be funded through existing cash on hand and incremental debt with committed financing in place. The transaction will represent a multiple of approximately 14x the 2026 expected synergized EBITDA. Upon closing of the transaction, TBG will have nomination rights for one seat on ESCO's board of directors and will own approximately 16% of the company. This deal aligns with the ESCO strategic planning process that we have discussed with you in the past as it continues our shift towards high growth end markets, adding complementary technologies and capabilities that increase our scale and product breadth in serving the global utility market. We expect to realize approximately $60 million in cost synergies by the end of year three, and for the deal to be accretive to adjusted earnings per share in the first 12 months.
Megger is expected to be accretive to USG revenue growth rates and highly accretive to adjusted earnings per share in year two and beyond. Cash consideration will be funded through cash on hand and incremental debt with committed financing in place. We expect our leverage ratio to be 2.5 x EBITDA or less when the deal closes, and we expect to be able to delever to less than 2 x within the first 12 months. Post-closing, we expect capital allocation to be focused on debt paydown as we focus on executing the integration of Megger and Doble. The transaction is subject to regulatory approval in both the U.S. and internationally, and we anticipate a closing date in the first quarter of our fiscal 2027. Let's go to slide five and talk a little bit more about the business.
Megger has a 130-year history as a market leader, providing electric test and measurement equipment. They are a global utility solution provider with a strong presence in Europe and the U.K. and will meaningfully expand our geographic reach. They operate out of seven primary manufacturing facilities and have expected 2026 revenue of $590 million. They offer a wide variety of products, software, and services that are nicely complementary to Doble's product and service offerings. Let's move to slide number six. This slide highlights the complementary nature of the offerings that Doble and Megger provide to their global utility customers. The addition of Megger will broaden our portfolio of low voltage, battery, cable, water leak detection, and circuit breaker testing, along with adding to our software and training product offerings. Our Doble business nicely complements Megger with its strong offerings in condition monitoring, power system simulation, and services.
As highlighted on slide number seven, Megger and Doble together will serve the full utility maintenance life cycle, from reactive to predictive maintenance. The companies have an extensive and complementary core test and measurement products. Doble has highly valued condition monitoring product line, while Megger's recent acquisition of IPS offers an integrated software solution for asset lifecycle management, grid operations support, and protection and asset testing that can be tailored to meet the needs of utilities worldwide. These are very important needs for utility customers, and ESCO will now be well positioned to support our customers with our diverse capabilities in a holistic and value-added manner. Let's go to slide number eight. As mentioned earlier, we expect to realize approximately $60 million in cost synergies over the initial three years post-close, which would result in 300 basis points of adjusted EBITDA margin expansion.
Our expectation is that these savings will primarily be driven by optimizing our manufacturing footprint and the potential for insourcing some of Doble's products, leveraging our direct material spending and engineering expertise, and the potential to synergize R&D, go-to-market, and overhead expenditures in SG&A. Let's go over to slide 9. This slide shows the evolution of our revenue profile related to our recent portfolio moves. The middle pie chart reflects the impact of the sale of VACCO and a full year of maritime revenue on the business in 2026, which has resulted in the A&D segment currently comprising approximately 50% of our overall portfolio, with USG being 30% and Test 20%. In the third pie chart, you can see the pro forma impact of adding in $590 million related to Megger's expected 2026 revenue.
The addition of Megger would increase USG revenue to slightly over half of the company's revenue, with A&D at roughly a third, and Test would decline to 14%. The Megger acquisition represents the next step in our portfolio transition, increasing our scale in the Utility Solutions market. Going forward, 85% of our revenue will be serving the A&D and Utility markets, where we have differentiated products with leading market positions, serving industries with long-term secular growth drivers. Let's go to slide number 10. This slide highlights our positioning in the A&D and USG markets after the transformative portfolio moves that we've made over the last two years. On the USG side, utilities face electric demand that is forecasted to double by 2050, with similar growth expected globally, driven by AI infrastructure build-out, heat pumps reshoring, EV charging, and the electrification of everything.
Our diagnostic solutions help utilities push more power through the existing grid, where the average age of large power transformers exceeds 40 years. In addition, we are well-positioned to support utilities as they invest in renewable generation and the infrastructure needed to connect it, along with the digital transformation required to improve efficiency, reliability, and sustainability. In A&D, commercial aerospace OEMs are committed to increasing their build rates to meet the long-term demand of airlines, and geopolitical tensions are driving higher defense budgets, benefiting military, aerospace, and naval spending. Submarine programs are a top priority in the U.S., and the Navy is completing a multi-year submarine procurement effort intended to strengthen the supplier base as it ramps up build rates. In the U.K., the government is developing its next-generation Fast Attack submarine in support of the AUKUS program.
We are well-positioned to serve the growing unmanned underwater vehicle market as customers address heightened maritime security concerns. Let's go to slide number 11 and discuss how the transaction meets our stated M&A goals. We've taken a thoughtful and deliberate approach to ESCO's enterprise strategy in recent years, focusing on acquisitions that strengthen our technology-led leadership in our preferred end markets. We target businesses that are complementary to our core operations, with proven financial performance and predictable revenue streams in attractive, high-growth end markets. The acquisition of Megger clearly fits these criteria, a differentiated business with a long track record of solid financial performance while serving the asset maintenance needs of utilities worldwide. Moving on to the final slide. The addition of Megger is another exciting step forward as we execute our plan to supplement organic growth with strategic M&A.
Our Utility Solutions businesses are well-positioned to benefit from increased investment in utility infrastructure as global electricity demand drives upgrades and the expansion of an aging grid. This acquisition supports our strategic objectives while maintaining a reasonable leverage profile. In summary, ESCO will be strengthened by the steps we're taking to grow our portfolio and increase exposure to end markets with compelling long-term growth. With that, we'll open up the phones for a Q&A session.
As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question will come from Scott Deuschle with Deutsche Bank. Your line is open.
Hey, good morning. Bryan, can you say what Megger's revenue and EBITDA was in calendar 2025?
Chris, you got that right there?
Yeah. It's actually not quite calendar. Their fiscal year end is November 30th, so that's kind of the numbers we're using are on that basis right now. They were just below $540 million of revenue, and I'd say a high teens EBITDA.
Okay. Would you expect their growth rate to be higher than that 6%-8% you're guiding Doble for in calendar 2026?
Yeah, we would say that they're probably more in the 7%-9% range. They've got really good exposure internationally and a couple of parts of the market where they'll complement Doble nicely.
Okay. Bryan, can you give us a sense as to what percentage of Doble's products could potentially be manufactured inside Megger's facilities? Does Megger have spare manufacturing capacity to take on those products?
Yeah. That's one of the things we're really excited about is Megger does have really outstanding manufacturing capabilities, right up from the board, SMT lines, et c., both in Europe and in the U.S. And they have plenty of additional capacity. Most of Doble's products, with the exception of our DGA analyzers, most of those products are made by third-party contract manufacturers. We're going to have a substantial opportunity there.
Okay. Sorry to ask so many questions, but Chris, what share price will the $1.4 billion equity component be priced at? Is it based on the share price when the deal closes or something else?
No. We used a VWAP mechanism, so we're going to issue just over 5 million shares at around 280 per share. That's kind of how that's going to work.
Okay. Last question, if you could just characterize the cadence of the cost synergies, that $60 million. Is it relatively linear across the three years or more weighted to the year three? Thank you.
Yeah. We've modeled it linear at $20 a year through the first three. We've obviously got to continue to do integration planning. We've done a lot of work already to get comfortable with the numbers. We feel like we're going to be able to get after this pretty quick. It's possible it could come in a little faster, but we thought it prudent to model at $20 a year, and that's what we did.
Okay. I'll jump back in queue. Thank you.
Thank you. As a reminder, to ask a question, please press star one one on your telephone. The next question will come from Jon Tanwanteng with CJS Securities. Your line is open.
Hi, good morning, and thank you for taking my questions, and congrats on the deal as well as the stronger Q2 results.
Sure.
I was wondering if you could talk a little bit more about Megger's end market breakdown. Maybe what portion of their business is directly tied to utilities and grids, what portion isn't, and then maybe break out any kind of end markets of note, like data center, and what those pieces are growing at?
Yeah. Broadly speaking, we would describe it as electrical. They do have a substantial amount that's in utility, but they do have exposure to data center. I think I got some numbers from them that were in the millions of dollars of direct-to-data center, and then a lot of supporting activity, which would be similar to kind of what Doble's doing. One of the benefits of this transaction is it does give us a lot of exposure to areas that Doble has not historically had a presence, and that would be more in the C&I-type electrical work. They do a lot more in distribution than Doble has historically. A lot of high-voltage cable testing which is entirely in addition to what Doble does today.
Yeah, it's a very complementary type of transaction, and they do have exposure to some higher growth areas that Doble hasn't quite had in the past.
Okay, great. Did you mention the expected time to close, and if there's any potential antitrust issues that we should be aware of?
We don't expect there to be any real risk there, but those things can be time-consuming, so we've got it estimated at about six months. There are a number of jurisdictions that we have to go to. There's not very much risk about that process. As you know, those things can be time-consuming. We're thinking that we'll be closing in our first quarter, which would be in that October to December timeframe.
Got it. Then you have a defined target for cost synergies, but maybe can you talk about revenue synergies, whether that's cross-selling regional access or things like cross-pollination of best practices and business models?
Well, I want to be clear that we have not modeled any kind of volume or revenue synergy as part of this deal. I think we do think that given the diversity of these two businesses and the excellence of the engineering teams on both sides, we do think there will be a lot of opportunities to combine products, create new solutions and ultimately grow the business at a rate that's faster than the two businesses are growing independently. I want to restate, we have not included any kind of revenue synergies as part of our model.
Okay, great. Thank you. I'll jump back in queue.
Thank you. The next question is going to come from Josh Sullivan with Jones Trading. Your line is open.
Hey, good morning.
Hi, Josh.
Just in the presentation, you talked a bit about Megger's software and analytics offering. Can you just highlight what they're currently doing there and maybe what portion of the business that is? Then as you have the data sets from both Megger and Doble, what could that look like as far as a product offering and maybe what you can bring to customers?
Yeah. Well, that's a great question, Josh. It's one of the more exciting aspects of this deal. Last year, Megger completed the acquisition of a business that's called IPS. IPS is a really exciting business. What the intent there is to broadly utilize advanced analytics and make those available to utilities. I think you know that we've had this incredible global database that we've been trying to figure out how to really deploy in this kind of modern software world. We think that kind of taking the IPS tools and talent and applying it with a lot of the core data stuff that comes out of our condition monitoring tools and our traditional test database.
We think that's going to be a real powerful combination, and it's going to give us the ability to do things for our customers that they first of all need and really aren't able to get anywhere else.
Great. Thank you.
Thank you. The next question will come from Jon Tanwanteng with CJS Securities. Your line's open.
Thanks for the follow-up. I was just wondering if you could give us any color on what you expect the incremental debt portion to be and what the market looks like for interest rates on that?
Yeah. We've got a bridge facility in place now to kind of backstop the deal. We're going to now be working to secure a term loan A and a term loan B to be the permanent financing in place for that. We're partnered with some lending institutions and feel good about our ability to do that. We've modeled, Jon, a 6.5% interest cost. I think, where we sit today, we would expect to be able to do better than that. That's kind of how we're looking at it right now.
Okay, great. Thank you. Does it make sense to explore any opportunities to reduce leverage more quickly? Maybe via some portfolio management or maybe pieces that are in core within Megger or any other parts of the business?
Well, listen, that's always one of the tools in our toolbox. Given the leverage profile here at 2.5 or less, we don't feel like we're compelled to do anything like that. Yeah, listen, we'll be talking with our board, but I would not anticipate that in the near term.
Got it. Thank you.
Thank you. The next question will come from Scott Deuschle with Deutsche Bank. Your line is open.
Hey sorry to ask a question on the quarter, but Chris can you characterize what drove the EPS beat in the quarter relative to your guidance?
Yeah. I would say that generally, we've had another good quarter. I would say kind of in line or better performance and probably a little bit of upside at A&D and tests kind of driving that favorability. Don't want to say much more than that. We'll get into the details here in a few weeks, but it was a good quarter. Yeah.
Okay.
Across the board.
Thank you very much.
Yeah.
Thank you. I am showing no further questions in the queue at this time. I would now like to turn the call back over to Bryan for closing remarks.
Well, thanks everyone for listening to this call. We're obviously very excited about this transaction. It will mean a lot for shareholders. It's going to be a lot for our industry, and I think we're going to be able, as I said earlier, to use the diverse capabilities of these two businesses to create even better solutions that are going to really help power the world. Looking forward to talking to you in a few weeks on our earnings call. Thanks for tuning in today.
This concludes today's conference call. Thank you for participating, and you may now disconnect.