Invensys Breakup Seen Boosting Value 32% With Siemens-GE

Invensys Plc (ISYS), the two-century-old company that makes software used to run the London Underground’s subway trains, stands to reap a gain of at least 32 percent for shareholders by putting itself up for sale.

Invensys, which has fallen almost 10 times as much as the FTSE All-Share Index of U.K.-listed companies since naming Wayne Edmunds its chief executive officer last year, said yesterday it had been approached by Emerson Electric Co. (EMR) and other potential bidders. After preliminary talks ended without an agreement and Invensys said no discussions are “ongoing,” the 1.79 billion pound ($2.79 billion) company could now attract Siemens AG (SIE) or General Electric Co. (GE), according to Huntington Asset Advisors.

While Invensys’s pension obligations are a potential obstacle to any deal, the London-based company is cheaper than 88 percent of its electrical-equipment rivals based on earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show. Credit Suisse Group AG says Invensys could be worth at least 2.36 billion pounds in an acquisition, giving the acquirer a company that generates more than a third of its sales from emerging markets and sells technologies for everything from power generation to railroads and oil refining.

Invensys is a company that “cries out to be part of a bigger company with better management” as part of a breakup or a takeover, Madelynn Matlock, who helps oversee $14.7 billion at Huntington Asset in Cincinnati, said in a telephone interview. “Someone is going to end up with them. It makes sense that Emerson or GE or Siemens would look.”

German Heritage

Richard Mountain, a spokesman for Invensys, declined to say whether the company is considering a sale or breakup. He also declined to say whether Invensys has been approached by Siemens, Europe’s largest engineering company, or GE, the world’s biggest maker of diesel locomotives.

Philipp Encz, a spokesman for Munich-based Siemens, and Deirdre Latour, a spokeswoman for Fairfield, Connecticut-based GE, declined to say whether their companies are interested in buying all or part of Invensys.

Mark Polzin, a spokesman for St. Louis-based Emerson, declined to say whether it is still interested in Invensys. He said Emerson, which makes power-plant and data-center equipment, approached Invensys in April about the industrial-automation unit and signaled its willingness to buy the whole company. Talks ended in early May, he said.

Emerson is restricted from actively making an offer for Invensys for six months, according to U.K. takeover rules.

Invensys, founded by a German-born British engineer named Augustus Siebe in 1819, was known as Siebe Plc before its acquisition of rival BTR Plc in 1999.

Shareholder Returns

While the deal helped Invensys almost triple in size, according to Hoovers Inc., the company has since lost almost 12 billion pounds in market value, data compiled by Bloomberg show.

Since Invensys appointed Edmunds to replace Ulf Henriksson as the company’s CEO in March 2011, the stock has tumbled 38 percent. The FTSE All-Share Index, the benchmark gauge for British common equity, declined 4.1 percent over the same span, according to data compiled by Bloomberg.

In January, Invensys fell by the most in nine years after saying fiscal full-year earnings would be “significantly” lower because of 60 million pounds in additional costs to fulfill contracts. In the year ended in March, Invensys’s net income decreased 44 percent. Its operating profit margin, a measure of how much earnings a company produces from each dollar of sales, fell to a seven-year low, the data show.

On June 20, shares of Invensys surged by the most since 2001 after Bloomberg News first reported Emerson’s approach.

‘Undermanaged Company’

One day later, Invensys retreated 14 percent to 220 pence after saying the discussions failed to produce an agreement.

Advisers to Invensys have also spoken to Siemens and GE about a sale of some or all of its operations since Emerson’s approach, people familiar with the talks said.

Invensys “is an undermanaged company,” said Ajay Kejriwal, a New York-based analyst at FBR & Co. “For someone like an Emerson or another well-managed, well-developed company, they’ll be able to take out costs and improve operations. So, it should sell at a decent multiple.”

Including net debt, Invensys is currently valued at 5.6 times its Ebitda in the past 12 months, according to data compiled by Bloomberg. That’s 37 percent less than the median 8.9 times for 70 companies in the electrical-equipment industry with more than $1 billion in value, the data show.

Emerson trades 7.6 times Ebitda, while GE is valued at 18.4 times, or twice the industry median, the data show.

Relative Value

Invensys is an “attractive name from a valuation standpoint,” Malcolm Polley, who oversees about $1.1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania, said in a telephone interview. “It could be a decent acquisition candidate.”

Invensys gets half its revenue from its so-called operations-management unit, which sells technology to automate plants and industrial facilities and helps make them cheaper to run, data compiled by Bloomberg show.

The division, which Emerson was interested in, would also be appealing to Siemens, according to Tintin Stormont, a London- based analyst at Singer Capital Markets Ltd. Siemens and GE, which produces, maintains and repairs locomotives, are potential bidders for the rail-signaling business, while Invensys’s growth in emerging markets would be attractive to any buyer, she said.

Revenue at Invensys has at least doubled in Asia, South America, and the Middle East and Africa in the past five years, helping to mitigate declines in the U.S., the U.K. and the rest of Europe, data compiled by Bloomberg show.

Emerging Opportunity

Developing countries accounted for about 35 percent of Invensys’s sales last fiscal year, the data show.

“In a takeout scenario or in a scenario where the group is broken up, nobody is really questioning that the group’s products and the opportunity they’re facing, particularly in emerging markets, will be very attractive to some of their competitors,” Stormont said in a telephone interview.

Nick Heymann, an analyst at William Blair & Co. in New York, says Invensys’s pension obligations, among the biggest in the U.K., could still stand in the way of a potential deal.

The company has projected benefit obligations equal to 3.25 times its equity value, higher than 98 percent of companies in the FTSE All-Share Index with at least $1 billion in market capitalization, data compiled by Bloomberg show.

Invensys’s 5.8 billion pounds in obligations at the end of March exceeded the value of the pension plan’s assets by 392 million pounds, according to its annual report.

Retirement Plan

The company “comes with a lot of baggage,” Heymann said. The size of the pension liability “keeps people away.”

Even with the obligations, Invensys could still command at least 290 pence a share in an acquisition based on projected earnings, Simon Smith, a London-based analyst at Credit Suisse, said in a report to clients dated June 21. That’s 32 percent higher than Invensys’s price yesterday.

The value of Invensys’s separate businesses could approach 350 pence a share as acquirers bid up the parts they want, based on a sum-of-the-parts analysis by Singer Capital’s Stormont.

While the price would reflect a 59 percent premium, it would still be cheaper relative to its estimated Ebitda this fiscal year than the median valuation in the electrical equipment industry, data compiled by Bloomberg show.

“You want to buy assets when they are inexpensive, when they’ve been undermanaged,” Tim Ghriskey, who oversees about $2 billion as chief investment officer of Solaris Group in Bedford Hills, New York, said in a telephone interview. “As a buyer, you think you could come in and reinvigorate those assets.”

To contact the reporters on this story: Thomas Black in Dallas at tblack@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net; Patrick Winters in Zurich at pwinters3@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Benedikt Kammel at +49-30-70010-6230 or bkammel@bloomberg.net.

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