Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Three's company in the construction-equipment industry. After a months-long bidding war over Terex, the U.S. cranemaker seems to have found a way to strike a deal with both its Finnish partner and Chinese suitor.  

Konecranes is offering $1.3 billion in stock and cash for Terex's material-handling and ports division. The deal is in lieu of a full-blown merger that was in the works since August 2015 but had been thrown in doubt when Chinese rival Zoomlion made a surprise counterbid in January. The new arrangement paves the way for Zoomlion to buy the rest of Terex, whose other businesses include construction equipment and rock-crushing machines.

Less is More
Both Terex and Konecranes rose after calling off their merger and opting for a partial deal instead.
Source: Bloomberg
Intraday times are displayed in ET.

It's the best possible outcome for all parties. Terex was unable to strike a sale to Zoomlion without first terminating its merger agreement with Konecranes, or waiting for its shareholders to vote against that deal. That was despite the fact that as of last week, the Chinese interloper's bid was roughly 70 percent higher than Konecranes's all-stock proposal, which had lost value as the Finnish company's shares slumped.

The proposed merger had gotten less attractive for Konecranes as well. The Finnish cranemaker said last month that the Treasury Department's clampdown on inversions essentially eliminated the 32 million euros ($36 million) in financial and tax synergies that the two companies had projected.

Interestingly, Konecranes says this smaller deal should deliver even more operational savings than it had initially estimated for a full Terex merger (140 million euros in three years versus 110 million). Part of that is due to the fact that Konecranes had started work on the full merger integration and found more opportunities for cost cuts in the process, but the two companies' industrial lift and port businesses are also more naturally complementary than the rest of Terex. It’s worth noting that the purchase includes industrial cranes, components and services sold under the Demag brand -- a business that Konecranes tried to buy in 2010 but was ultimately acquired by Terex for $1.4 billion the following year. 

For Zoomlion, stopping short of a full takeover means a lighter debt burden. The Chinese company's total borrowings have roughly doubled over the past five years to 41.4 billion yuan. There's nothing wrong with borrowing for growth (which Zoomlion badly needs), but in the past three years, the company has reported only a few quarters of positive operating cash flow.

Towering Debt
Zoomlion's total borrowings have almost doubled to more than 41 billion yuan in the past five years
Source: Bloomberg

And it has an unusually large amount of receivables, which makes its balance sheet look akin to that of a bank. Receivables were 133 percent of sales last year, giving it the distinction of the biggest load of unpaid revenue among Chinese publicly traded non-financial companies. Being owed so much and paid so little, it's nice to save on a big acquisition.

Burning Cash
Zoomlion's operations have been patchy in the past three years
Source: Bloomberg

Zoomlion could still end up buying all of Terex. In that instance, Terex would owe Konecranes a $37 million breakup fee. Such an outcome seems unlikely, though. For one, the port handling business was the piece of Terex most likely to ring alarm bells for the Committee on Foreign Investment in the U.S., which is charged with assessing the national security risk of foreign takeovers. Given Zoomlion's partial government ownership and ties to the People's Liberation Army, some U.S. politicians had already raised questions about the Chinese company getting involved with critical infrastructure.

The current proposal would put industrial lifting gear and components and services for manufacturing, ports and rail facilities in Konecranes' hands. Sensitivities remain, but this arrangement could help Zoomlion avoid the fate of GO Scale Capital or China Resources, whose bids for Philips's Lumileds unit and Fairchild, respectively, were derailed by regulatory opposition. 

All Downhill
Zoomlion hasn't reported an operating profit since September 2014 as construction slowed in China
Source: Bloomberg

China's regulators may be more pleased with a smaller deal as well. The government has been cracking down on currency outflows amid concern that outbound acquisitions could put further pressure on the yuan. 

This three-way tie-up is an elegant job of sharing the goods and making the deal process a win for all. 

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

To contact the authors of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net
Christopher Langner in Singapore at clangner@bloomberg.net
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editors responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net
Beth Williams at bewilliams@bloomberg.net