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Biggest Merger Profit Seen in Demag as Terex Spurned: Real M&A

No company in the world can enrich its owners more by demanding a higher takeover price than Demag Cranes AG.

Demag, which almost doubled in the past year as it spurned approaches from two potential buyers, rose 12 percent above an unsolicited bid this month of 41.75 euros a share by Terex Corp., according to data compiled by Bloomberg. The gap is the widest of any all-cash proposal over $1 billion, indicating that arbitragers are betting Dusseldorf, Germany-based Demag, the world’s largest maker of mobile cranes used to lift cargoes from container ships, will get a better offer, the data show.

With more than 80 percent of the world’s trade carried by sea, a rebound in global demand is helping to boost returns for shareholders in Demag, which has cranes installed in four of the world’s busiest ports. While Terex Chief Executive Officer Ron Defeo says he won’t enter a bidding contest and “significant overlaps” will keep away potential suitors, his bid may attract interest from Konecranes Oyj and Cargotec Oyj, according to Bankhaus Lampe KG. That may boost the cost to buy Demag to 52 euros, Norddeutsche Landesbank Girozentrale said.

“People are expecting not only a bump from Terex, but also an interloper like Konecranes for example to come in here and make a rival offer,” said Sachin Shah, a merger arbitrage strategist at Capstone Global Markets LLC in New York. “Terex’s willingness to press on demonstrates that they’re willing to pay something higher. It seems to me Terex is aware that it’s not 41.75 euros that’s going to get this done.”

Cranes, Backhoes and Loaders

“This is a full and fair offer,” Tom Gelston, a spokesman at Terex of Westport, Connecticut, said yesterday. “We wanted this deal to be friendly, but haven’t had that friendly contact with management, so we’re working on public information alone.”

Terex, which makes cranes used at construction sites, as well as backhoes and wheel loaders, said in a statement today it was starting its tender offer to Demag’s shareholders of 41.75 euros for each share owned. The proposal values Demag at 1.04 billion euros ($1.5 billion) including net debt and requires at least 51 percent of Demag’s owners to accept, Terex said.

Demag’s management and supervisory board are studying the proposal and will provide a detailed response that will include a recommendation to shareholders, the company said today.

Defeo, 59, is taking his offer directly to shareholders after saying that Demag’s management refused to negotiate a deal on friendly terms. Demag, which was taken public by New York-based private equity firm KKR & Co. and Siemens AG of Munich in 2006, is run by 54-year-old Aloysius Rauen.

Independent Streak

Rauen said on an earnings conference call May 4 that “on several occasions in the past year, personal contact at the highest levels” had taken place between Demag and Terex.

Terex’s approach was reviewed and “on the whole not in the interest of the company and its stakeholders,” he said.

“They want to remain independent,” Defeo said at an analyst meeting on May 16. “That’s the position they took last year. That’s the position they took as recently as late March when I spoke to their CEO, who refused additional conversations with me.”

Terex said that buying Demag will “substantially” increase its earnings.

Shares of Demag closed at 46.62 euros in Xetra trading yesterday, 4.87 euros higher than Terex’s proposal. Before Terex announced its unsolicited offer, Demag traded at 36.30 euros. A year ago, the stock was worth less than 25 euros.

Demag slipped 1.1 percent to 46.10 euros today, while Terex was little changed at $29.65 at 1:14 p.m. in New York.

Potential Suitors

Demag’s largest shareholder, Cevian Capital AB’s Lars Foerberg, said in an e-mail last week that Terex’s proposal is “completely inadequate” and doesn’t reflect Demag’s value. Stockholm-based Cevian owned about 10 percent of Demag as of January, data compiled by Bloomberg show.

Raising the bid by 5 euros a share to 46.75 euros would boost Terex’s total cost by about $150 million, the data show.

Thomas Wybierek, an analyst at NordLB in Hanover, Germany, says Demag may command as much as 52 euros in an acquisition, or about 25 percent higher than Terex’s current offer.

The bid may reignite interest from Hyvinkaa, Finland-based Konecranes, the world’s largest supplier of industrial cranes, which approached Demag last year, according to Gordon Schoenell, an analyst at Bielefeld, Germany-based Bankhaus Lampe.

Helsinki-based Cargotec, the biggest maker of container-lifting gear, may also step in with an offer, he said.

Bidding Contest

In October, Konecranes said in a statement that it contacted Demag a month earlier to “discuss a potential combination of the two companies.” Konecranes dropped its plan in February after Demag showed no interest.

“The next step in the takeover battle that we expect is a counterbid from Konecranes,” Hans-Joachim Heimbuerger, a Frankfurt-based analyst at Credit Agricole SA’s Cheuvreux unit, wrote in a report to clients dated May 12.

Mikael Wegmuller, a spokesman at Konecranes, and Cargotec’s Pauliina Koivunen didn’t respond to telephone calls and e-mails requesting comment.

Thomas Wissler, a Hamburg-based analyst at Hauck & Aufhaeuser, says Terex may not be willing to raise their bid as much as investors want and Demag’s rivals may be dissuaded by regulatory hurdles designed to prevent one company from gaining too much market share.

“The current price targets contain too much hope for a counterbid,” he said. Wissler recommends selling the stock and estimates Demag is worth 39 euros a share. That would represent a 16 percent loss for investors who bought the shares at yesterday’s closing price.

Shareholder Value

Terex, sitting on $1.1 billion in cash, is pursuing Demag after its own shareholders lost 60 percent of their money in the past three years through yesterday. In that span, industrial companies in the Standard & Poor’s MidCap 400 Index returned 13 percent to owners including dividends.

The deal would boost sales at its own mobile harbor crane business, which Defeo called a “big loser” in the company’s analyst meeting this week. Demag, which has more than 660,000 of its cranes and hoists currently installed around the world, this month reported a 64 percent jump in second-quarter earnings as global trade spurred demand for its harbor cranes.

Demag is profiting as global commerce increases 6.5 percent this year after expanding a record 14.5 percent in 2010, according to the World Trade Organization. Emerging economies such as China will lead the growth, Geneva-based WTO said.

The company has equipment installed in some of the world’s largest container ports including Hong Kong, Busan in South Korea, Dubai and Rotterdam, according to Demag’s Britta Heyn.

Global Reach

The proportion of revenue generated in emerging markets will increase to 40 percent by the fiscal year ending Sept. 30, 2013, versus 36 percent last year, Demag said in its second-quarter earnings presentation. The forecast doesn’t include the company’s option to buy a majority stake in China’s Weihua Group Co., a maker of container cranes, Demag said.

“Terex is betting world trade will rise, and as it does, companies like Demag will benefit,” said NordLB’s Wybierek. “Terex’s offer for 41.75 euros does not reflect the company’s value if factoring in its future growth rates.”

Terex is still recovering from the first global recession since World War II. Analysts estimate Terex will have sales this year of $5.5 billion, 45 percent less than in 2008, according to data compiled by Bloomberg.

Demag’s services division, which performs repairs, maintenance and inspections on cranes and hoists, would cushion Terex’s earnings, which are more vulnerable to economic slowdowns, Hauck & Aufhaeuser’s Wissler said.

Trade and Repairs

The unit, which generates a third of Demag’s revenue, accounted for 92 percent of operating income from its three main businesses last year, data compiled by Bloomberg show.

“The businesses Terex are in are highly cyclical,” Wissler said. “That’s why they want Demag -- their services business is a buffer in times of weak demand.”

That may ultimately force Terex to offer more, according to Ulrich Scholz, a Munich-based analyst at UniCredit SpA. He estimates a “fair value” bid would equal about 50 euros.

“Demag has built a very strong position in services, that makes it an interesting target,” he said. “Terex will raise their offer, 41.75 euros is not the last thing we’ll see.”

Overall, there have been 9,503 deals announced globally this year, totaling $940.8 billion, a 22 percent increase from the $771.4 billion in the same period in 2010, according to data compiled by Bloomberg.

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