The return of takeover deals in the engineering-related sectors has reignited excitement over a possible wave of further acquisitions by US and European conglomerates among followers of UK-listed stocks.
But opinion remains divided over whether this month’s £997m takeover of Chloride by Emerson of the US, following a tussle with Europe’s ABB to win control of the provider of uninterruptible power supply systems, is the starting gun for a resumption in takeouts of UK companies following the hiatus caused by global recession.
While Emerson rewarded Chloride investors by raising its bid from 275p offered in April to 375p, lower down the scale, investors in engineering consultancy Scott Wilson more than trebled their money over a month as its accepted a £223m offer from San Francisco-based URS Corporation aimed at extending its international footprint.
The notion that “the Americans are coming”, with the prospect of high-premium contested takeovers reviving a trend that saw UK companies such as Enodis, the industrial catering equipment maker, and Expro International, the oil services company, transferred expensively to US hands after febrile auctions in 2008, has gained some traction among those covering the industrial sectors.
Oliver Wynne-James, analyst at Panmure Gordon, argues that a number of stocks in the engineering-related sector look vulnerable after the Chloride takeover.
The strength of the dollar, combined with continued low valuations of UK engineering stock, has created “an attractive enough window” for more deal making this year.
The slow growth in some industrial economies could actually encourage large conglomerates to augment modest prospects for organic growth through mid-scale acquisitions, he adds – making some UK companies suitable targets.
Among his “high conviction target list” are Morgan Crucible, Rotork, Halma, Spirax-Sarco and Fenner, though he suggests companies with enterprise values of £1bn or less would prove more digestible.
Chris Dyett, at Investec, also predicts more takeover activity led by US companies. The average US conglomerate, has emerged from recession with plenty of firepower and – now the trough in demand is over – is becoming more willing to deploy it.
“The difference between last year and this is that they are willing to spend,” he says. He predicts half a dozen or more of the slimmed-down list of UK engineering-related stocks could be taken out in the next three years.
Harry Philips, of Evolution Securities, is also bullish.
“We are going to see more, particularly if valuations stay where they are, he says. “The common denominator is that UK engineering, what remains of it, tends to be global niches, with attractive high margins. “We do see a lot more activity. To various degrees, none is safe.”
Steve Medlicott of Altium cautions the scale of some companies could militate against bids.
“The issue with some of these companies now is that they are in the £1bn-plus bracket and the sector hasn’t seen that sort of size bid for quite a while.”
And John Dean, analyst at Jefferies, argues that punters betting on achieving high takeout premiums on a wave of M&A deal could be disappointed – as acquisition activity goes the other way.
“Every time, when the sector bounces back, the prospect of the Americans coming over the hill is always raised,” he says.
“We are talking about big groups with deep pockets, while these UK companies in sterling are undervalued. But takeovers never materialise to the extent people think. We normally only see the odd deal or two.”
He suggests that US acquirers’ eyes are fixed not on the UK and Europe – where growth prospects are weak – but on Asia Pacific and other emerging economies.
Meanwhile, a growing number of UK companies such as Weir have signalled their willingness to return to dealmaking to fuel their own growth targets.
Further down the food chain, perhaps “UK companies should be seen as the hunters, not the prey,” he argues.
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