Terex's (TEX) merger with REV Group (REVG) has good strategic value, but the timing, structure, and overall value of the transaction to both parties points to elevated risk, Morgan Stanley said in a Tuesday note.

The deal is favorable for Terex to reduce its debt and for REV Group to scale up and expand capital deployment opportunities, Morgan Stanley analysts said. The move to sell or spin off the Aerials business also reduces Terex's overall business cyclicality, with more than 70% of the pro forma TEX's revenues expected to come from end markets such as waste, emergency, and utilities, the analysts said.

Despite these benefits, the deal is expected to generate only limited revenue and operational synergies, with expected synergies at about 1% pro forma excluding Aerials sales, the analysts said.

However, the recent double-digit correction in both companies' stock prices seems to reasonably price in the risks, including the possibility that Aerials might be sold at an unfavorable point in the business cycle, according to the note.

Morgan Stanley upgraded Terex's stock rating to equal-weight from underweight and raised the price target to $47 from $41. The firm also reduced the price target of REV Group's stock to $55 from $64.

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