The Weir Group Plc, a British pressure pump manufacturer, proposed a merger with Finnish rock crusher maker Metso Oyj to cut expenses as mining companies worldwide put investments on hold.
Weir, whose market value of 5.3 billion pounds ($8.8 billion) was about 50 percent higher than Metso’s before today, proposed an all-share merger, it said in a statement today. Metso, which earlier said in a separate statement that it’s considering an unsolicited approach by Weir, rose 19 percent in Helsinki trading.
Weir’s proposal includes a premium of as much as 10 percent, according to three people familiar with the matter. The company foresees a split of about 60 percent to 40 percent though that amount could change, two of the people said. Weir declined to comment on the potential allocation of shares.
A combination with Helsinki-based Metso would allow Weir to add rock crushers for the mining industry and valves for liquefied natural gas to target a wider range of customers. Weir Chief Executive Officer Keith Cochrane said in February he’s looking to buy more mining, oil, gas and valves companies following the acquisitions of drilling control company Mathena Inc. and mining supplier R Wales.
“Strategically it would be a very good fit,” Harry Philips, a London-based Canaccord Genuity Corp. analyst who recommends buying Weir shares, said by phone. A deal would allow Weir to sell Metso’s offerings to clients wanting additional services and via its global service network.
Weir said a merged entity could be listed on the London and Helsinki stock exchanges. The company didn’t give more financial details. The London-based Times newspaper reported Weir’s aproach earlier today.
Metso shares surged 4.61 euros to 28.34 euros, the biggest gain since at least 1999. Weir fell 0.7 percent in London. Before today, Weir shares had risen 19 percent since the start of the year while Metso had declined 2.4 percent.
A merger of Weir and Metso would generate synergies of at least 300 million euros, according to a separate note from Canaccord.
“Metso occasionally receives these types of proposals and, in case the board of directors of Metso considers them serious, evaluates such proposals,” the Helsinki-based company said in a statement today. “Contrary to market rumors, Metso is currently not and has not been engaged in discussions with Weir although it is in the process of considering Weir’s proposal.”
Weir in February forecast a return to underlying growth this year, citing better prospects in its energy business. Momentum increased in oil and gas last year and profitability in that business improved in the second half, the Glasgow, Scotland-based company said in a statement at the time.
Weir’s oil and gas business was helped by the acquisitions of Mathena and R Wales last year, which contributed 70 million pounds in revenue. Weir predicted sales and profit growth this year on a constant currency basis with margins broadly in line with 2013.
Metso, which earlier this year spun off its paper-machines unit into a company called Valmet Oyj, is focusing on costs as miners worldwide put investments on hold. Metso began a 100 million-euro savings program Oct. 24 after cutting its full-year outlook a week earlier. The company wants to achieve most of the savings this year, with as much as half coming from improved sourcing of goods and services.
Metso Chief Executive Officer Matti Kaehkoenen in January predicted falling prices as mining customers spend less in a “transition year.” Metso’s mining, construction and automation business had an operating profit margin of more than 11 percent of net sales in 2012, compared with a 4.9 percent margin for the spun off pulp, paper and power assets.
Metso’s second-largest shareholder Solidium said today that Weir’s merger proposal was a “natural activity” as mining companies face pressure to reduce investments. Solidium said it still targets to be a long-term investor in the company as the industry’s long-term growth outlook is “strong.”
“The company is also able to develop further on its own,” Hanna Masala, investment director in charge of Solidium’s 11.1 percent stake, said by phone.
The break-up of Metso and Valmet was implemented almost nine years after Cevian Capital’s co-founder Christer Gardell and U.S. investor Carl Icahn first called for it, citing lack of synergies in the mineral and paper-equipment divisions.
Metso has said that it’s prepared to spend “several hundred million euros” on acquisitions as it waits for spending by the world’s largest miners, such as Rio Tinto Plc, to recover. Metso plans to expand its services business and automation unit revenues, especially in advanced oil and gas valves, according to Kaehkoenen.