Sulzer Pushes Metco Coatings Development With Extra Cash

Sulzer AG’s Metco coatings unit is getting a “significant” share of development funding to keep pace in a fast-changing industry, the head of the division said.

Sulzer, which ranks fourth worldwide in its main business of making pumps, is providing Metco with above-average research funding as a proportion of revenue because of opportunities to bring out new products, Cesar Montenegro, the unit’s top executive, said in a phone interview. The division is also spending 10 million Swiss francs ($10.7 million) to expand capacity for ceramic materials for coating parts for airliner engines and industrial-gas turbines, he said.

“There is less room to continue developing fundamentally new applications or new features for a pump,” Montenegro said. “Surface technology is the opposite,” as “every year you find new applications, new technologies and new materials.”

Metco is the world’s largest maker of thermal-spray coatings, the result of what Montenegro estimated was about 40 acquitions by Winterthur, Switzerland-based Sulzer since 1985. That includes the 1994 purchase of the Metco brand from U.S. laboratory-equipment maker PerkinElmer Inc. Business is expanding as planemakers Boeing Co. and Airbus SAS win orders and engine suppliers seek coatings to improve fuel efficiency, Montenegro said.

Venezuelan national Montenegro joined Sulzer in 1977, and became chief of Metco in 2008 after a stint as head of Sulzer’s pumps business in North America.

Merger Speculation

A possible merger of Sulzer and Pfaeffikon, Switzerland-based equipment maker OC Oerlikon AG, or of their coating units, has been the subject of industry speculation since Russian billionaire Viktor Vekselberg, the world’s 57th-richest man, started investing in both manufacturers through his Renova companies.

Oerlikon said in March that it had 1.2 billion francs available for acquisitions, which would be targeted at expanding its coating and vacuum units.

“It’s a clear focus of Oerlikon management to make something happen in coating, both via investment and through acquisitions,” said Benjamin Glaeser, an analyst at Berenberg Bank in London. “Sulzer Metco would be a good fit, as it would allow Oerlikon to strengthen its own physical-vapor-deposition exposure and at the same time expand its technology range.”

Sulzer hasn’t announced intentions to sell any of its divisions, spokesman Thomas Gerlach said. Montenegro said it’s not his call whether Metco will stay a part of Sulzer. Oerlikon doesn’t comment on speculation, said spokesman Burkhard Boendel. Rolf Schatzmann, a spokesman for Renova, had no comment.

Further Deals

Metco has the highest return on capital employed of Sulzer’s divisions and the second-highest operating profitability at 10 percent of sales. The turbo-services business’s operating margin was 10.8 percent of revenue in 2012. By comparison, Oerlikon’s Balzers coating unit generated the group’s highest operating margin at 20.5 percent of revenue.

Sulzer dropped a 1.1 billion-pound ($1.69 billion) bid in 2007 to buy U.K. coatings-maker Bodycote Plc. The offer was 49 percent higher than Bodycote’s market capitalization at the time and 10 times earnings before interest, taxes, amortization and depreciation.

Metco makes two to three acquisitions per year and will continue to work on its pipeline of targets, Montenegro said. Any deal won’t be as big as the Sulzer pump unit’s $935 million acquisition of Cardo Flow Solutions in 2011, Montenegro said.