A Heavy Lift for Terex

The state-backed machinery company is offering all cash and a high premium.

Snubbing a takeover offer from Chinese construction-equipment maker Zoomlion Heavy Industry could come back to bite Terex.

Off to the Races

Industrial companies have been involved in many of the year's biggest deals so far.

Source: Bloomberg

The $2.4 billion U.S. crane maker confirmed  on Tuesday that it had received an unsolicited bid from Zoomlion, which if accepted would scuttle a previously announced agreement  for Terex to merge with its Finnish rival Konecranes. In case you're counting, there are now three continents involved here (we told you deals were getting complicated). It's just another sign of stepped-up M&A among industrial companies looking for growth and expansion.

Zoomlion is offering $30 a share in cash -- roughly double what Terex shares were trading for on Monday. That's the kind of premium biotechnology companies or fast-growing tech startups command, not a declining, old-school maker of cranes that lift cargo from container ships at ports.

Terex said it's carefully reviewing the bid. It had previously rebuffed the Chinese company, people familiar with the matter told Bloomberg News. Should it continue to resist Zoomlion's advances, Terex will need to explain to shareholders why it's better off staying on its current course. News of the unsolicited bid alone sent Terex's stock soaring 37 percent on Tuesday, and another 7 percent in trading early Wednesday.  

Not only is the premium substantial, the terms are much better than the current merger agreement with Konecranes. In that transaction -- a  tax-inversion deal that would move Terex's domicile to Finland -- Terex holders would receive 0.8 of a Konecranes share. The exchange ratio valued Terex at around $30 when the deal was announced back in August, but the value of the proposal has since been deeply eroded by a slump in Konecranes shares amid slowing demand for lifting gear and growing competition. Given that volatility, there may be a benefit to taking cash today.

Best Option?

Terex's all-stock deal with Konecranes has lost value as the Finnish company's stock has slumped.

Source: Bloomberg

Perhaps Terex is worried about U.S. regulators putting up a stink over any deal with Zoomlion, as they have been wont to do with Chinese buyers of businesses deemed vital to national security. Zoomlion is also partially owned by the government in the Hunan province of China, which may trigger more red flags for regulators. Caution around regulatory approval is certainly fair -- many a deal has fallen apart in the face of scrutiny by the Committee on Foreign Investment in the U.S. Just last week, Philips had to cancel plans to sell its lighting- components business to a group led by China's GO Scale Capital.

Zoomlion is also already burdened with a high debt load and there are questions as to whether it can really afford this offer. Dealreporter reported on Wednesday that the Chinese buyer is working with a private-equity firm,  a partnership that could ease financing concerns. Zoomlion's state backing may also help it obtain necessary loans. 

At $30 a share, Terex has to take Zoomlion seriously. If it doesn't, there's a chance the Chinese suitor may find Konecranes just as appealing. Both Terex and Konecranes would offer Zoomlion a strong entry into North American and European markets, so either would do as a partner. Plus, with a market value of about $1.4 billion, Konecranes is less than two-thirds the size of Terex. Konecranes has some big shareholders that would need to be convinced, but at the right price, a deal could be possible. Some investors certainly seemed to think its a possibility, sending Konecranes shares up 9 percent on Tuesday,  before giving back much of those gains on Wednesday. 

Terex should be wary of leaving itself without a partner.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Brooke Sutherland in New York at bsutherland7@bloomberg.net

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