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June 3, 2013 12:06 am
Rock, paper, scissors is one way to decide who does the washing up. It also sums up the business of Metso. For over a decade, the Finnish conglomerate has operated a paper and pulp business alongside a heavy equipment unit that focuses on the kind of mining machinery that crushes and grinds resources. Little wonder its board signed a plan on Friday to split the company in two. Shareholders will vote on the proposal in October. They should approve the demerger.
Structural declines in the paper industry have left Metso’s paper unit dragging on its mining equipment division. Paper and pulp orders fell by a quarter in 2012 while mining and automation fell just 6 per cent. The 11 per cent margin on earnings before interest, tax, depreciation and amortisation in the mining arm is also almost three times more than in paper. Under the proposal, Metso will become a pure mining equipment company with €1.4bn of equity and less than €400m of net debt. Paper will be spun off into a new listed company called Valmet with equity of €870m and a net cash position. That should allow management to focus on competing with Andritz, the paper industry leader.
Still, the remaining mining group will not be without challenges. The end of the commodities supercycle has prompted miners to revise down capital expenditure plans leaving all equipment suppliers under pressure. Valuations within the mining equipment industry have already fallen close to historical lows of about 9 times enterprise value to earnings before interest and tax. And Metso is at the lower-end of the equipment business compared with peers such as Atlas Copco. Thus, even losing paper would not allow Metso to catch up fully. Metso’s shares rose 10 per cent on 25 March when the group announced that it was mulling a demerger. Shareholders should not have to play games to decide on this proposal.
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