Morgan Crucible Takeover Seen With Shares Sliding 33%: Real M&A

Morgan Crucible Co. (MGCR), the U.K. maker of ceramics used in wind-turbine blades, is vulnerable to becoming the industry’s next takeover target after its valuation sank to a three-year low and 3M Co. (MMM) agreed to buy its rival.

Shares of Morgan Crucible tumbled 33 percent from an almost 14-year high reached in February as revenue growth slowed on weakened demand and its profit outlook worsened. That left the Windsor, England-based company at its lowest valuation relative to earnings since 2009. Even based on analysts’ reduced estimates for next year, Morgan Crucible is still cheaper than 81 percent of similar-sized specialty-chemicals producers for the materials industry, according to data compiled by Bloomberg.

A buyer such as 3M, which agreed this month to acquire Ceradyne Inc. (CRDN) to expand in ceramics, could now consider an offer for Morgan Crucible to take advantage of its cheap valuation, said Panmure Gordon & Co. While sales and orders may remain depressed in the months ahead, Peel Hunt LLP says an acquirer still may find value in the business. Morgan Crucible is a leading supplier for industries such as aerospace and power generation, according to JPMorgan Chase & Co.

“The short-term difficulties they face are obviously reflected in the current valuation,” Dominic Convey, a London- based analyst at Peel Hunt, said in a telephone interview. Still, “Morgan Crucible has some very strong market positions in niche segments. From that perspective, then it is an attractive target.”

A spokesman for Morgan Crucible said the company doesn’t comment on market speculation. Donna Fleming Runyon, a spokeswoman for St. Paul, Minnesota-based 3M, didn’t return a phone call seeking comment.

Tank Armor

Morgan Crucible, with a market value of 673 million pounds ($1.1 billion), makes ceramics used in everything from turbine blades and hip joints to tank armor and insulation that protects black-box data recorders found on airplanes. It also manufactures carbon brushes that help power motors used by producers of steel, food, paper and pharmaceuticals.

Shares of the 156-year-old company surged on Feb. 24 to 360 pence, the highest level since 1998, after the company said it earned 73 million pounds last year on record sales. That topped analysts’ average net income estimate of 71 million pounds, data compiled by Bloomberg show. Morgan Crucible also said that it was still “well placed to make further progress” on a three- year goal to double pre-tax profit by 2013.

Since then, the stock has declined 33 percent as the company’s growth rate slowed and it issued a profit warning. Corporate insiders including Chief Executive Officer Mark Robertshaw, Chief Financial Officer Kevin Dangerfield and other members of management, unloaded more than 1 million shares between February and April, the data show.

Today, Morgan Crucible shares fell 0.4 percent to 239.6 pence.

Right Time

Morgan Crucible’s enterprise value sank on Oct. 15 to 5.17 times trailing 12-month earnings before interest, taxes, depreciation and amortization, its lowest multiple since July 2009, according to data compiled by Bloomberg. Based on reduced Ebitda estimates for 2013, Morgan Crucible traded last week at a multiple of 5.72, cheaper than 81 percent of specialty-chemicals producers larger than $1 billion, the data show.

“Now is the time to strike,” Oliver Wynne-James, a London-based analyst for Panmure, said in a phone interview. “You have a lot of angry shareholders, you have a slightly tarnished management team, and then you have a discounted valuation.”

Ceradyne Parallels

Parallels can be drawn between the ceramics businesses at Morgan Crucible and Ceradyne, which 3M agreed to buy Oct. 1, said Peel Hunt’s Convey. 3M, the manufacturer of Post-it sticky notes, is paying $860 million for Costa Mesa, California-based Ceradyne to expand into ceramics as the material becomes more popular across some industries. In September, 3M’s new CEO Inge Thulin had said the company was considering larger deals.

Ceramics are more heat-resistant and harder than metal, according to William Blair & Co. analyst Nick Heymann, who said at the time of the Ceradyne deal that 3M needs acquisitions to spur growth amid weak European markets and China’s slowdown.

3M or another buyer could look to Morgan Crucible next, said Panmure’s Wynne-James. Gaining more scale in the market would lead to increased pricing power and the ability to better leverage relationships with clients globally, he said.

“This market is all cut up for all the players, sliced and diced so each enjoys a nice market share in their niche,” Wynne-James said. “Because it’s quite fragmented, there is room for a large corporation to get into this high-end ceramics and carbon market and roll up a decent market share.”

Cookson Combination

Morgan Crucible also could merge with the ceramics division of Cookson Group Plc (CKSN) should the company split in two, he said. Cookson, the world’s biggest maker of ceramic linings for metal smelters, is considering a breakup, given the limited operational overlap between its engineered-ceramics and performance-materials divisions, the company said May 17.

A spokesman for London-based Cookson declined to comment on deal speculation.

In 2006, Morgan Crucible held discussions with a potential buyer. There also was speculation that it had rejected a buyout offer from Wiesbaden, Germany-based SGL Carbon SE, the Sunday Times reported in August 2006.

Now, a takeover is less likely, according to Royal Bank of Canada’s Andrew Carter.

“Morgan is a very different company now to what it was back then,” the London-based analyst said in a phone interview. “We have in the past seen U.K. engineers warn on profits and the share price very significantly overreact on the downside. I don’t think that has happened in Morgan Crucible’s case this time, however.”

Still Attractive

Before the Oct. 12 profit warning, analysts from Citigroup Inc., JPMorgan and Panmure said Morgan Crucible may attract a takeover price on average of at least 425 pence a share. While the sales and profit outlook has weakened since then, Panmure’s Wynne-James said the company could still fetch 400 pence a share, 66 percent more than last week’s closing price.

“Morgan Crucible has some very good performance material know-how,” Wynne-James said. “Because the shares are depressed at the moment, this is a great time to go for Morgan Crucible.”

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net

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