Colfax said it is exploring strategic options, including a sale, for its air and gas handling business, which makes compressors and turbines largely for oil and gas companies.
The DJO deal, the company's biggest ever, moves it to a fast-growing industry familiar to its founders and chief executive officer. Brothers Steven and Mitchell Rales, who founded Colfax two decades ago, also built medical equipment company Danaher Corp, while CEO Matt Trerotola worked at Danaher before joining Colfax.
But the acquisition and plans to offload the air and gas unnerved investors and analysts.
"It's a completely new market for the firm, outside of the industrial market. Also, the strategic review of the non-welding business was unexpected," Northcoast Research analyst Tom Hayes said.
The company is buying DJO Global from Blackstone Group, hoping to tap the growing demand for medical devices such as knee and hip implants from ageing baby boomers.
"DJO strengthens our exposure to higher-growth, higher-margin, less cyclical markets," Trerotola said on a call with analysts.
The air and gas handling business, which makes heat exchangers and gas compressors, generated about 40 percent of Colfax's total revenue in 2017.
The core of the air handling business is tied to global energy projects, Hayes said. "These tend to be large in nature and thus are cyclical and can also be deferred or delayed, which makes the revenue from these projects more unreliable."
The DJO deal will add to Colfax's adjusted profit in the first full year after the deal closes in the first quarter of 2019. DJO will operate as a new segment within Colfax after the deal.
Colfax will fund the deal with cash, debt and equity.
J.P. Morgan is the financial adviser of Colfax. Goldman Sachs & Co LLC, Credit Suisse and Wells Fargo Securities LLC are advising DJO.
(Reporting by Munsif Vengattil and Arunima Banerjee in Bengaluru; Editing by Anil D'Silva and Saumyadeb Chakrabarty)
By Arunima Banerjee and Vibhuti Sharma