Economic climate makes it tougher to play Footsie

UK Engineering companies are losing out on much-needed investment because they are dropping out of the Stock Market’s top FTSE 100 index.

Restructuring, specialisation and the global downturn are weakening companies’ abilities to raise funds on stock markets.

A firm’s position in any market index is dictated by its capitalisation – that is the share price multiplied by the total number of shares in circulation. The more share prices plunge, the more difficult it becomes to attract large sums of investment.’If you drop out of the FTSE 100, your stock falls off the radar screens of large index tracking funds. This could lead to a lower rating and make access to capital more difficult,’ said Old Mutual analyst David Larkam.

Car giant GKN is expected to drop out of the FTSE 100 soon following the demerger of its industrial services business, even though its shares have rallied by 13p this week to 290p.

As The Engineer went to press, the required market capitalisation was at least £2.5bn. GKN is close to dipping below that mark, because post demerger its value is £1bn. It would be the final automotive-related stock to drop out.

The company’s possible exit is the latest in a long line of engineering businesses falling from the top 100, a slide that began in the 1980s. In 1984 their share of the FTSE 100 index was 16%. Today the figure stands at just 2.2% and since 1990 the number has fallen by more than half. An independent committee decides who is a member every quarter.

Marcus Beresford, GKN’s new chief executive, is sanguine. When asked about leaving the FTSE 100 he told The Engineer: ‘Whether we’re in or out we’ll still be a large global player.’

But other engineering firms take a very different view. Smiths Group has publicly stated that it bought engineering company TI Group last year because it was determined to re-enter the FTSE 100 after a year outside it.

The problem with being outside the FTSE 100 is that any position in the market index can be seen as an indication of strong future earnings expectations – though it can still harbour companies in trouble.

Outside the top 100, many investors are not interested. For any non-FTSE 100 companies trying to raise money, selling shares is less easy, while issuing more shares to raise cash will reduce earnings per share and make the business less attractive. It’s a vicious circle.

‘Another problem for GKN is that its debts have remained with it, and have not been shared with the demerged services. That increases its debt profile and raises its risk rating, again deterring investors,’ said Larkam.

The FTSE-100 now contains only a few engineering firms – Invensys, Smiths Group, BAE Systems and aerospace engine company Rolls-Royce.

Paul Compton, an analyst at Collins Stewart, explained that as UK engineering firms have specialised, they have shrunk. ‘The old UK conglomerates are dead, but the corollary is that any specialised engineering company is unlikely to be big enough to be in the top 100,’ he said.

Invensys may soon follow GKN. The troubled £3bn automation and controls group has issued three profits warnings in less than a year and chief executive Allen Yurko announced last month that he would step down.

Dropping out of the FTSE 100 and finding it harder to gain investment is not the only problem for these slimmed-down UK engineering firms. One analyst told The Engineer: ‘They may not remain wholly UK owned for much longer. These smaller companies are attractive to much larger US firms. Invensys might get bids from the likes of General Electric or Tyco.’