IMI will boost earnings with Polypipe purchase

Gearing at engineering group IMI is set to rise to more than 100% following last week’s £337m acquisition of plastic building products group Polypipe. The deal, being funded through existing resources and bank borrowing, is expected to enhance earnings within a year. Strong cash generation, however, is expected to lead to gearing falling back sharply […]

Gearing at engineering group IMI is set to rise to more than 100% following last week’s £337m acquisition of plastic building products group Polypipe.

The deal, being funded through existing resources and bank borrowing, is expected to enhance earnings within a year. Strong cash generation, however, is expected to lead to gearing falling back sharply within a few months.

IMI said the acquisition gave it access to a new range of products and entry into the plastic products industry. The company will be integrated into its hydronic controls business, which is mostly metals-based.

IMI will also benefit by expanding into a new product area. Hydronic Controls is one of four main divisions at IMI – besides drinks dispensers, fluid power and energy controls.

`The addition of proprietary plastic products and technology will significantly expand the firm’s product range,’ said chief executive Gary Allen.

He added that IMI would continue to look for other acquisitions, though these are likely to be smaller, bolt-on deals as Polypipe is absorbed into the group.

The 200p-a-share cash bid is equivalent to a premium of 27% over Polypipe’s closing price on 14 April, the day before it announced it was in bid talks. The price is equivalent to 13 times the company’s expected earnings for the year to June.

Polypipe last year reported pre-tax profits of £34.6m on turnover of £273m. Net assets were worth £121m.

IMI is not expected to look for big cost savings at Polypipe. The company is expected to grow into new geographic markets, and IMI will also be able to sell Polypipe products into continental Europe. The UK currently accounts for most of Polypipe’s turnover.

The firm makes drainage and waste systems; plastic conduits for cable management, plumbing and central heating; plastic bathroom and kitchen fittings; and uPVC window and roofing products.

IMI’s founder, Kevin McDonald, who set up the business in 1980, holds almost 17% of the company’s shares, and will scoop more than £56m from the sale of his stake.

Co-founder Geoffrey Harrison will receive about £12.5m for his 3.7% stake.