Invensys Seen Luring Emerson Again After Sale: Real M&A
Invensys Plc (ISYS), the engineering company whose takeover discussions with Emerson Electric Co. (EMR) broke down last year, is becoming more palatable for acquirers after shedding its railroad division and reducing pension liabilities.
Siemens AG’s purchase of the rail-infrastructure business, which closed yesterday, makes the rest of London-based Invensys a more attractive takeover candidate, Baring Asset Management Ltd. said. While Invensys’s 76 percent rally since the deal was announced in November is six times more than the FTSE All-Stock Index, its sales multiple is still cheaper than most peers, according to data compiled by Bloomberg.
Emerson is the most logical buyer and could offer a 19 percent premium for the $4.9 billion company, which sells products such as safety systems and refrigeration components, said Societe Generale SA. Other potential suitors may include General Electric Co. (GE), ABB Ltd. (ABBN) or Schneider Electric SA (SU), Royal Bank of Canada said. With ValueAct Holdings LP -- the activist investor that successfully pushed for Gardner Denver Inc. to sell itself this year -- announcing a stake in April, Exane BNP Paribas said Invensys could be bought.
“The road is now clear for Emerson or another larger electrical group to come and bid” for Invensys, Jonathan Mounsey, a London-based analyst at Exane BNP Paribas, said in a telephone interview. “I doubt the stock would be trading where it is today if there wasn’t some belief that something is going to happen.”
Richard Mountain, a spokesman for Invensys, declined to comment on whether the company is open to selling its remaining businesses or has held discussions with buyers.
Invensys said in June that it had been approached by Emerson about a possible deal and that talks ended without an agreement. At the time, Invensys was grappling with pension liabilities, which amounted to 490 million pounds ($761 million) at the end of September.
The pension costs were an overhang Invensys “obviously wanted the buyer to rectify as part of the purchase price,” Nick Heymann, a New York-based analyst at William Blair & Co., said in a phone interview. “Clearly Emerson decided that that was not remotely feasible.”
Invensys agreed in November to sell its rail-signaling unit, which makes technology that helps prevent trains from colliding, to Siemens for 1.74 billion pounds. The company pledged 625 million pounds of the proceeds for the pension.
The decision to slim down and bolster the pension make Invensys a more digestible and attractive takeover target, said James Buckley, a London-based fund manager at Baring Asset Management, which oversees about $49 billion including Invensys shares.
“It does make it a bit more streamlined,” he said in a phone interview. “You’ve got a niche business with a pretty leading position and long-term growth markets. There is probably no shortage of potential suitors,” he added. “Sooner or later, this one goes out.”
Invensys shares have gained 76 percent since Nov. 27, the day before the divestiture was announced. Still, Invensys trades at a multiple of 1.4 times its projected 2013 revenue, lower than 67 percent of measurement instruments companies valued at more than $500 million, according to data compiled by Bloomberg.
Emerson is a “natural candidate” for a takeover of the rest of Invensys’s businesses, Steven Winoker, a New York-based analyst at Sanford C. Bernstein & Co., said in a phone interview. The maker of technology for refrigerators and air conditioners was mainly interested in Invensys’s meter and control systems business -- which Invensys still has -- when it approached the company last year, a person familiar with the matter said at the time.
Now that Invensys has sold off the rail unit, what’s left are businesses with a large customer base that would bolster Emerson’s own process management and industrial automation operations, said Alasdair Leslie, a London-based analyst at Societe Generale.
Following the sale, “you’ve effectively got the asset that” Emerson wanted, Leslie said in a phone interview. “It’s obviously going to be a lot easier” to justify a deal. He estimated Emerson could offer about 460 pence a share for Invensys. The stock closed at 387 pence yesterday.
David Farr, chief executive officer of St. Louis-based Emerson, said in September that the company had considered a deal with Invensys on and off for 15 years and would continue to look at the company’s process-automation business. Mark Polzin, a spokesman for Emerson, declined to comment on whether the company is interested in Invensys.
While Emerson is the most logical buyer, other bidders including ABB, Schneider or GE could be lured by Invensys’s process-management businesses because they provide high margins with limited competition, said Andrew Carter, a London-based analyst at RBC.
Invensys will be “‘in play’ once the rail disposal is complete,” Carter wrote in an April 19 note to clients. He estimates the company could fetch more than 450 pence a share in a takeover.
Representatives for Zurich-based ABB, Rueil-Malmaison, France-based Schneider and Fairfield, Connecticut-based GE declined to comment on whether their companies are interested in Invensys.
Invensys has been losing market share in process management to competitors including Honeywell International Inc., Rockwell Automation Inc. and even Emerson, which may deter acquirers, said Heymann of William Blair.
“You’re buying kind of a weakened competitor, and I don’t necessarily sense that Invensys’ exposure to any particular end markets would be uniquely critical to Emerson,” Heymann said.
Still, ValueAct’s stake in the company may signal that a deal is imminent, according to Carter of RBC. The investment firm owned about 8 percent of Invensys shares as of April 22, according to an April 24 statement.
ValueAct bought shares of Gardner Denver (GDI) last year and pushed for a sale. Private-equity firm KKR & CO. agreed to buy Gardner Denver for $3.9 billion in March. George Hamel Jr., chief operating officer of ValueAct, didn’t respond to a phone message seeking comment.
“Activist investor involvement suggest some change/action may be on the horizon,” Carter wrote in the report last month. “Invensys will be more attractive to Emerson and potentially others post completion of the rail disposal.”
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