Last week shareholders voted on the £3bn merger of TI Group and Smiths Industries to create the Smiths Group, putting paid to any chances of a counterbid.
Prior to the merger, other suitors were circling, attracted by an initial collapse in the share price of both companies following the announcement of the deal. For a few days, both companies looked like bargains — the result of a sceptical market that remained unconvinced by the synergies of the deal. At one point Smiths shares plunged to 632p, compared with 835p before the deal was announced.
And when United Technol-ogies’ bid for Honeywell failed after an eleventh hour gazumping by GE, rumours circulated that UT might make a play for TI Group. But that just pushed the prices of both Smiths and TI back up again, effectively closing the door to bargain hunters, for the time at least.
Despite earlier doubts, and after energetic lobbying by Smiths Group chief executive Keith Butler-Wheelhouse, the market seems to have accepted that there is some upside to the deal. After all, even if the expected synergies and growth do not materialise within the new group, there are enough big players with deep pockets in what is a fast consolidating industry to step in and bid for the new combined group.
The other potential advantage lies in the possible synergies the merger creates. On first sight, the market worried about the merger creating just another conglomerate, at a time when a number of similar mergers had created so-so results. So what is the new group really made of?
Planes and tubes and cars
Smiths Industries is big in avionics, medical engineering and also has an industrial division — a mix of ventilation systems, tubing, and telecoms infrastructure. TI’s pie meanwhile splits into Dowty aerospace, the Sealing Solutions division (which brings together John Crane and its Engineering Polymers operations) and its automotive division, about to be sold off.
On the aerospace front, the two businesses look complementary. Smiths’ strong suit is as an avionics and control systems supplier to the civil and military markets in the US and UK, the two of which account for 94% of its profits by geographical region.
TI’s Dowty specialises in hydraulics and actuation systems — largely made in the UK — turbine components, airframes and cockpits. It is a main supplier to the Airbus programme and has a more even spread than Smiths in global markets, with nearly 40% of its profits coming from outside the UK and US. The technology fits well too: putting Dowty’s mechanical systems alongside Smiths’ electrical controls will create more scope for modular systems design.
So far, so synergistic. However, for the rest of TI Group, the dovetailing is less neat. Automotive fuel systems will be out of the picture, probably being sold by next spring, most likely to a US private equity company for a target price of £1.2bn. Bill Laule, currently chief executive of TI, will depart with the sale of the automotive division, which has become a major player in fuel delivery systems to around half the world’s auto industry. The preferred bidder will be announced next month.
Sealing the deal
That leaves the £1.1bn Sealing Solutions business, made up of John Crane and Engineering Polymers. Crane is the world leader in mechanical seals but is suffering from being in a mature market and relying on offshore investment cycles. The Engineering Polymers business has already been through a stringent cost-saving programme, and its 15% market share gives it the number two slot — evidence that the market is severely fragmented and the chance for further acquisitions could lead to more cost savings.
Most observers believe the new Smiths Group will polish up the Sealing Solutions division and then sell it off, though the company would not confirm this. So far, the merging companies have been modest about the potential savings created by the merger, claiming that around £25m will be shaved from costs each year. Analysts think the real savings could be three times as much.
Smiths and TI Group should complete the deal and start trading as SI Group on 4 December. It should then be only a matter of weeks before the City gets a new FTSE-100 engineering company — something of a rarity these days — with a combined market capitalisation of around £4.2bn.