Atlas Copco Chief Seeks Large Deal If Valuations Can Be Tamed

Atlas Copco AB, the Swedish compressor maker that in 2014 made its biggest acquisition in 14 years, still has the appetite for another “transformational” deal if valuations placed on target companies can be tamed, Chief Executive Officer Ronnie Leten said.

The world’s largest maker of air compressors last year purchased U.K.-based Edwards Group for $1.5 billion, to take the top spot in vacuum technology for the semiconductor industry. Atlas Copco is now seeing opportunities for similar large acquisitions in the industrial space.

“There are still businesses which come close to compressors, vacuum and industrial tools that you could consider,” Leten said in an interview at Bloomberg’s Stockholm offices. “We are constantly hunting, constantly looking at opportunities.”

Sweden’s biggest companies now have more cash than at any time in at least 15 years, potentially allowing them to go on an acquisition spree. But the valuations of many targets in and outside Sweden have risen dramatically because of historic monetary easing, making it difficult to pick the right target, Leten said.

“Of course, then it comes to the multiples. Are you going to buy something for 12, 13 or 14 times Ebitda?,” the executive said. “That’s the big issue.”

Each of Atlas Copco’s four business areas has a list of potential targets and Leten said there are “nice opportunities” of varying sizes, including ones with the potential to transform the 142-year old company. Atlas Copco recently paid an extra dividend to shareholders, yet still has plenty of firepower: financing deals is the “easiest part,” the CEO said.

Boosting Service

Over the last decade, Atlas Copco has bolstered its services business, which now accounts for 43 percent of revenue. Services are typically two to three times more profitable than equipment sales, and Leten said he wants to increase their share of revenue to 50 percent.

“We are becoming more and more of an insurance company,” the CEO said. “It gives you a good, rewarding profit, and it gives a good service to the customer.”

The increase in services has been a shelter in a tough period for Atlas Copco’s mining unit. Like other equipment makers, it’s seen declining orders and revenue from mining gear for the last three years, as miners like BHP Billiton Plc, Rio Tinto Plc and Vale SA have cut investments in response to declining commodity prices.

Mining Woes

After calling the bottom of mining equipment demand almost a year ago, Leten was forced to admit a further decline in equipment orders when Atlas Copco posted first-quarter results last month, with only some $150 million worth of mining equipment orders in the period. Services now account for some 75 percent of the mining unit’s business.

The day before the report was released, Atlas Copco shares were at an all-time high, having gained more than 30 percent since the beginning of the year. The stock dropped 8.8 percent on the day of the first-quarter results, but Leten says that decline was probably a necessary market correction.

“Everything went up,” Leten said, referring to the share price development in the weeks before the report. “We and a couple of others got a crazy bonus, and I think we didn’t deserve that.”

With the company’s shares now trading more than 15 percent below their peak, they’re back at levels where Leten saw it as a good investment for his personal portfolio. He says acquisition opportunities that could transform the company further are also a good reason to buy the company’s stock.

“If I didn’t see them, I wouldn’t have bought shares in Atlas Copco,” he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE