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3M to Divest Electronic Monitoring Business for $200 Million

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Diversified industrial goods manufacturer 3M Company (MMM - Free Report) recently inked a definitive agreement with Apax Partners, a premier global private equity advisory firm, to divest its electronic monitoring business for $200 million. The transaction is expected to be completed by the third quarter of 2017, subject to mandatory closing conditions and regulatory approvals.

The held-for-sale business is part of the Traffic Safety and Security Division, which is an integral component of the Safety & Graphics segment. The electronic monitoring business offers a wide array of Global Positioning Systems, Radio Frequency, and alcohol verification monitoring and tracking solutions, supported by an integrated software monitoring platform. These products are widely used by correctional and law enforcement agencies across the world. The business employs approximately 265 employees and generates annual global sales to the tune of $95 million. Post divesture, these employees will be absorbed by Apax Partners.

3M decided to divest the business to focus on the evolving needs of the transportation safety and mobility businesses. Over the years, the company has continuously pruned its businesses to improve customer relevance, productivity and speed through a leaner operating structure. At the same time, 3M has maintained a steady investment in R&D to develop innovative products.

3M expects to deliver sustainable increase in earnings and free cash flow, benefiting from its long-term strategy of accelerating investment in high-growth programs. The company’s ability to convert high R&D spends into up-cycle market share gains and strong pricing powers determine its success. Organic growth remains the first priority of the company as it continues to invest in infrastructure and commercialization capability. With a diligent execution of operational plans, 3M has outperformed the Zacks categorized Diversified Operations industry with an average year-to-date return of 14.4% compared with a paltry 1.9% gain for the latter.



3M's global footprint, diversified product portfolio and the ability to penetrate in different markets have been its forte. For the five-year period of 2016–2020, 3M expects 8–11% growth in earnings per share driven by an organic sales growth of 2–5%. It expects about 20% return on invested capital during this tenure with a free cash flow conversion rate of 100%. Furthermore, 3M is standardizing its business processes through a new, global ERP system. The company expects these efforts to result in $500 to $700 million in annual operational savings by 2020, and an additional $500 million reduction in working capital.

3M presently has a Zacks Rank #2 (Buy). Some other stocks in the industry worth considering include Hitachi, Ltd. (HTHIY - Free Report) , Bunzl plc (BZLFY - Free Report) and Federal Signal Corporation (FSS - Free Report) . While Hitachi sports a Zacks Rank #1 (Strong Buy), both Bunzl and Federal Signal carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hitachi has a long-term earnings growth expectation of 13%. It topped estimates thrice in the trailing four quarters with an average earnings surprise of 158.5%.

Bunzl has a long-term earnings growth expectation of 3.2%.

Federal Signal has beaten estimates twice in the trailing four quarters with an average earnings surprise of 3.1%.

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