The first two months of 1999 have seen a feverish level of bid speculation in the engineering sector but activity is expected to tail off until the autumn. The reason, say many observers, is that a mini rally of engineering stocks has priced opportunistic buyers out of the market.
Buyers are now hesitating, the argument goes, and wondering if current valuations are realistic. Before Christmas, many engineering companies argued that their stocks were ludicrously undervalued; now, the market is well aware that the outlook for British manufacturing in general, and Rover-exposed automotive suppliers in particular, is uncertain.
Coupled to this is the fact that some parts of the aerospace business which, in last year’s bleak market, provided sustenance to many engineers looks to be entering a downturn.
‘Valuations of engineering stock have been driven up recently against a background of bid speculation,’ says Steve Medlicott, analyst at stockbroker Albert E Sharp’s Birmingham office. ‘But there is not enough information out there at the moment to assess whether these values are realistic when you look at the trading prospects of many companies over the rest of the year.’
As a result, many potential US buyers will sit tight until more data comes to light about prospects for manufacturing.
US buyers are heavily involved because the cost of capital is much lower in the US. At the same time, depressed stock values among UK engineers mean that most cannot raise sufficient funds to make bids.
‘The US players also tend to look at a company on a purely financial basis,’ adds Medlicott. ‘In the UK, buyers are looking more at the industrial logic when putting two companies together.’
However, most US approaches have failed at the first hurdle, many because recent rises in UK stock values have made the whole deal look less attractive. As a result, the start of this year has seen as many bid rebuttals as it has deals.
So alongside TRW’s success in beating Federal Mogul to take LucasVarity, there have been notable failures. Earlier this month, Weir group rebuffed a £600m bid from US rival Flowserve, while Hall Engineering rejected a hostile £51.8m bid from UK engineer TT Group.
Meanwhile, kitchens and equipment supplier Berisford, listed as an engineer, this month rejected a bid from an unnamed US company.
And at the end of January, the Fullarton computer casings company, part of the Laird Group, beat off a bid from a US electronics group. Fullarton was an attractive target as it has grown at 30% a year and contributes two thirds of Laird’s profit in sharp contrast to its troubled car body, seals, and locks and security divisions.
Bid rumours have spread throughout the sector. Stratford-upon-Avon engineer Finelist was at the centre of (denied) rumours earlier this month, and Wyko admitted that it is ‘considering its options’ as its share price remains depressed.
Apart from TRW, US engineers shopping for British firms have had some successes. Last autumn, UK pumps and gears specialist David Brown was bought by US industrial group Textron for £195m. Textron is understood to have examined several other UK engineers, but has yet to make any other public bids.
Adwest Automotive, which had been attempting to turn itself into a first-tier supplier by buying up a collection of smaller automotive firms, was itself snapped up in January by US Group Dura Automotive Systems, a US manufacturer of drive control systems, in a £124.8m deal.
The buyers are not coming solely from the US. Venture capitalists report that company chiefs are now more receptive to their approaches, as pressure mounts on quoted companies to halt sliding share prices. This is hastening a trend, most notable among smaller companies, to go private.
Among the larger, quoted companies, there are few examples of this. This week, rumours of a management buy-out plan for FKI by former boss and founder Jeff Whalley were scotched in a company statement that also denied involvement in takeover talks.
However, among companies with a small market capitalisation, the trend is clear. One analyst said he had seen figures showing that across all sectors, and excluding the all-share index, no less than four publicly quoted companies were going private each day.