Cash for Cranes
With markets off to a rocky start in 2016, there's something to be said for cold hard cash.
Corporate acquirers have offered their targets all-cash deals 62 percent of the time in takeovers announced so far this year. That compares with about 52 percent for 2015. The old adage that cash is king holds weight -- and Terex, the U.S. cranemaker in the middle of a takeover battle, is going to find it harder to ignore that maxim.
The $2.3 billion company is faced with a choice between an all-stock merger with Finnish competitor Konecranes and a competing all-cash bid from Zoomlion for $30 a share, which the Chinese company said late Tuesday it's continuing to advance.
Both have risks. With Zoomlion, one issue is a potential regulatory block by the Committee on Foreign Investment in the U.S., which gives heavy scrutiny to deals involving Chinese buyers -- especially ones with government ties such as Zoomlion. Another is how the company plans to pay for a deal given its already heavy debt load. The Konecranes all-stock proposal, on the other hand, has lost more than a third of its value since the deal was struck in August as slow growth and slumping commodities erode demand for heavy machinery. 1
Terex initially rebuffed Zoomlion's advances. It's still in the process of reviewing the Chinese company's proposal, management said Tuesday. For its part, Konecranes has given the only real defense you can give for a stock proposal that's dropped significantly in value: the market is undervaluing the prospects for the combined company.
The gloomy forecast that Terex gave for 2016 late Tuesday pokes holes in that premise. The cranemaker warned investors that they're in for a 10 percent drop in revenue this year after 2015 sales plunged by about that much in the biggest drop since the financial crisis. Even Terex's big profit driver, aerial work platforms (used in construction or airplane maintenance), is struggling as North American rental customers grow cautious on their spending and demand for replacement equipment declines.
Things don't look all that much better at Konecranes. The company projects an increase in sales and adjusted operating profit this year. But as Bloomberg Intelligence has noted, it's going to need a pickup in lucrative industrial crane orders to meet its Ebit target. Unfortunately, that's a part of Konecranes' business it says has met with weak demand and it could continue to be hit by global growth concerns.
With sluggish growth and weak demand on the horizon, the sales and profitability goals Konecranes and Terex laid out for themselves when they struck their merger back over the summer start to look overly optimistic. Sure, there are also the synergies -- about $121 million in annual cost savings -- which should help blunt some of the downturn. Terex and Konecranes are separately cutting costs on their own. But is that enough to convince shareholders that this is the better deal?
That $30-a-share price starts to look pretty good if you think you might be waiting several years to see that kind of value from a combined Terex-Konecranes.
Terex stock bounced as much as 8 percent on Wednesday. The move was likely driven more by the fact that Zoomlion provided additional details on how it intends to finance a takeover than any optimism about Terex's results, says Chris Ciolino of Bloomberg Intelligence. Terex isn't treating CFIUS as an issue that would preclude a deal with Zoomlion as it discusses the Chinese company's bid, according to Reuters. So if regulatory approval and financing aren't that big of a deal anymore, Terex is running out of reasons for not just taking the money.
The deal is structured with Konecranes as the acquirer because it's a tax inversion, but Terex shareholders would end up with 60 percent of the combined company.
To contact the author of this story:
Brooke Sutherland in New York at firstname.lastname@example.org
To contact the editor responsible for this story:
Beth Williams at email@example.com
To continue reading this article you must be a Bloomberg Professional Service Subscriber.
If you believe that you may have received this message in error please let us know.