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Chemring Drops on Concern Carlyle Will Stop Short of a Bid

Chemring Group Plc, a British developer of missile-avoidance equipment, fell the most in seven months in London trading amid concern that interested suitor Carlyle Group LP may not follow through with an offer.

Chemring dropped 9.8 percent to 373.90 pence, valuing the company at 722.7 million pounds ($1.14 billion). The Fareham, England-based company reached 414.7 pence on Aug. 17 after disclosing the “highly preliminary expression of interest.”

“Carlyle walking away remains a serious risk,” Guy Brown, an analyst at Oriel Securities, wrote in a note.

Chemring is among defense companies grappling with spending purges, including the threat of an additional $500 billion in U.S. defense cutbacks. The company has been trying to globally diversify its sales and has seen revenue from non-NATO customers reaching around 30 percent.

The fact that Chemring only issued the statement about Carlyle after a jump in its share price last week suggests “a reasonable chance that the bid does not materialize,” according to UBS.

Carlyle’s previous investments in defense include a 31 percent stake in research group Qinetiq Plc in 2002 and United Defense Industries, which it exited in 1997. It maintains a stake in less-lethal munitions maker Combined Systems Inc.

Trade Buyers

Even if a Carlyle bid does not materialize, the interest from the buy-out firm “may prompt trade buyers to take a shot,” London-based Ben Bourne of Liberium Capital said in an note to investors. He named Esterline Technologies Corp., Alliant Techsystems, Rheinmetall and General Dynamics Corp. as potential buyers.

Chemring could be a better fit for Esterline, Alliant Techsystems and Rheinmetall than for larger defense prime contractors, Brown said. The question smaller companies face is “if they could get the funding and act fast enough to outbid Carlyle,” he said.

Credit Suisse Group AG said pricing for a Chemring takeover could be as high as 450 pence a share. Oriel Securities set a target price of 450 pence, to reflect the preliminary nature of the bid.

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