Onex, Canada Pension Approach Tomkins for Possible $4.4 Billion Takeover

Onex Corp., Canada’s biggest buyout firm, may add to its investments in the auto industry with a 2.9 billion pound ($4.4 billion) bid with the Canada Pension Plan Investment Board for Tomkins Plc.

The Canadian investors outlined a 325 pence-a-share cash proposal for Tomkins while reserving the right to lower the offer, the London-based manufacturer said today in a statement. That’s 41 percent higher that Tomkins’s July 16 closing price.

Onex has invested in manufacturing for industries including plastics, steel-making and auto-parts. The Toronto-based firm spent $5.58 billion with the Carlyle Group to buy Indianapolis- based Allison Transmission from General Motors Corp. in 2007. That same year it bought Husky Injection Molding Systems Ltd. of Bolton, Ontario.

Canada Pension, the country’s second-biggest retirement fund, has increased its private equity investments and last week bid $3.1 billion for Intoll Group in its second attempt to buy an Australian toll-road operator in eight months.

Due diligence for Tomkins “is now at an advanced stage,” Tomkins said. Onex Chief Executive Officer Gerald Schwartz said in May that attractively priced businesses and a rebound in credit markets would stimulate large acquisitions.

Tomkins climbed 28 percent to 294.2 pence in London trading, valuing the business at 2.59 billion pounds. Onex rose 3 cents to C$25.10 at 11:25 a.m. in Toronto Stock Exchange trading.

Onex Vice President of Investor Relations Emma Thompson declined to comment, as did Canada Pension spokeswoman Linda Sims.

U.K. Investments

Canada Pension owns stakes in about 35 companies worldwide in its principal investing portfolio, including U.K.-based Alliance Boots, U.S. retailer Dollar General Corp., Skype Technologies SA, and U.S. phone-equipment maker Avaya Inc. The pension fund manager has pursued stakes in companies in the past year, including a $5.06 billion investment with TPG for IMS Health Inc. of Norwalk, Connecticut.

Buying Tomkins, which has reported losses the last two years, would add building products, valves and auto parts to investments of Onex and Canada Pension.

“The company was dirt cheap,” said Mark Wilson, an analyst at Collins Stewart Plc, who started covering Tomkins a year ago. “A competitor could step in. An industrial buyer might not be quick enough, but private equity is definitely possible.”

Following a career as a commercial lawyer, Tomkins CEO James Nicol, a 56-year-old Ontario native, spent his early years in management at Canadian automotive parts company Magna International Inc.

Canada Connection

“The CEO is very popular in Canada, with a great reputation and a strong following there,” said Wilson. “I’m not surprised that the bid has come from Canada.”

Tomkins is the latest European manufacturer to be targeted as buyout firms and cash-wielding global engineering companies seek to invest in new markets and products. Emerson Electric Co. agreed to pay $1.5 billion for Chloride Group Plc, a British maker of backup power systems that had attracted a rival bid from ABB Ltd. of Switzerland. Safran SA is seeking to buy Zodiac Aerospace SA.

“The U.K. manufacturers have been showing good savings from restructuring,” Wilson said. “The recovery is sharper than expected across the board.”

Following the move on Tomkins, there’s “obvious read across” to GKN Plc, a British maker of components for aircraft and cars, as well as to French auto-parts maker Valeo SA of France and ball-bearing maker SKF AB, Wilson said. Other possible targets include Invensys Plc and Charter International Plc, which is “well run” and “cheap,” the analyst said.

Rival Bidders

Rival suitors for Tomkins will be hard pressed to pursue the company as “the biggest factor likely to get in the way” is time, given the advanced stage of due diligence, he said.

Onex had about $1 billion in cash and $3.9 billion in third-party acquisition funds as of May 5, it said in a prior statement.

The British company predicted a dip in sales and profitability in the second half of 2010 following signs of weakness in global economies. The global market for automotive original equipment in the second half is now expected to be little changed from a year earlier and down by a mid-single- digit percentage from the first half of 2010, Tomkins said.

Sales volumes through June gained about 23 percent from a year earlier as carmakers restocked inventories depleted during the financial crisis. That helped offset continued declines in the U.S. construction industry.

First-half operating profit is expected to total $290 million, equal to a margin of about 12 percent, Tomkins said today.

JPMorgan Cazenove is advising Tomkins.

“Some of the shareholder who will be happy with this are the hedge funds,” said Wilson. “The long-term U.K. ones would be wanting to hold out for more value.”

To contact the reporter on this story: Andrew Noel in London at anoel@bloomberg.net

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