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Crushing blows

1 April 2014 By Quentin Webb

Weir may struggle to extract a merger agreement from Metso. The Scottish engineer has pitched a tentative all-share union to its Finnish rival, worth $5 billion before news of the potential deal leaked out. There is strategic logic. But Weir’s timing looks opportunistic, and Metso can afford to be patient.

Weir and Metso make complementary products. Weir is bigger in specialised “slurry pumps” while Metso leads the market for machines that crush, grind and screen rocks and minerals. Together the duo could ramp up sales of kit and services to miners, drillers and builders. And based on previous sector deals, Weir could, conservatively, cut costs equivalent to 3 percent of the target’s sales in overlapping businesses. Taxed and capitalised, this might have a net present value of 680 million euros, Breakingviews calculations suggest.

The financial backdrop is persuasive too. The duo’s fortunes have diverged. Weir’s oil and gas clients are enjoying the shale gas revolution while Metso’s miners are still penny-pinching. Weir’s stock rose 19 percent in the first three months of the year, and its forward price-earnings multiple expanded from 13 times to nearly 17 times. Metso’s stock has barely budged. There is a clear defensive benefit too: with Metso, Weir would be harder for a GE, Flowserve or Caterpillar to swallow.

As yet there are few firm details on how value will be split. Reuters suggests the merged group could be 40 percent owned by Metso shareholders. To be sure, Weir is a higher-margin business, with a greater focus on lucrative after-market services. But that’s not an overly generous ratio for Metso, given it would already produce 40 percent of combined net income this year, before synergies.

Then there is what looks like opportunism. Weir is pouncing months after Metso spun off its Valmet unit, which manufactures paper-making machines. The target has a clear self-help strategy, with 100 million euros of cost cuts planned, and its own M&A goals. Metso’s biggest shareholders, Finnish state investor Solidium and activist heavyweight Cevian, might prefer to sell once an upturn in mining capital expenditure has arrived. If Weir really wants a deal it might need to dig deeper.



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