Sparks are flying as never before in the world of welding. A bidding war is shaping up for Charter International, now that the acquisitive US engineering group Colfax Corp has come out of hiding to say that it might make an all-cash offer. If that happens, it will have to be a knockout blow to dislodge an indicative cash-and-shares offer already tabled by Melrose, a UK-based private equity-style vehicle. The Melrose offer values Charter at 850p a share; Colfax may need to top 900p. It looks like a tall order for the US group (market value $1bn), which is barely half the size of Charter (a bid-inflated £1.3bn).
Just because Colfax is small does not mean it cannot afford to enter the race. That would be to underestimate Steven and Mitchell Rales, the billionaire brothers who own 42 per cent of Colfax (and a chunk of the $30bn Danaher manufacturing group). Colfax says existing shareholders are ready to finance any offer. An all-cash bid would have certainty; Melrose’s offer has been leaking value since it was increased last week. Only about a third is in cash, and its share price – 281.1p on Monday – is starting to discount heavy equity issuance.
There are fewer synergies between Colfax and Charter, however. The former is not present in welding, which accounts for about two-thirds of Charter’s 2010 revenues of £1.7bn, though the fit between the US group’s core fluids-handling business and Charter’s Howden air and gas handling looks good. Both companies are also diversified internationally: almost all of Charter’s revenue, and three-quarters of Colfax’s, is earned outside its home market.
Charter shares, trading at 15 times earnings, up from 9 before Melrose approached in June, look fully valued. So Colfax must find a lot of cash to land a knockout blow. This industry-shaping takeover battle still looks like Melrose’s to lose.
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