Medium-sized engineering companies may follow smaller firms by abandoning the stock market, industry analysts said this week.
The claim follows last week’s news that management at Senior, the flexible tubing manufacturer, may buy the company out, taking advantage of a drop in the share price. If the bid succeeds at the company’s current market value of around £250m it will be the biggest engineering management buy-out for five years.
Senior confirmed it was considering several bids including one from the company’s management team. An announcement is expected by the end of March.
One city analyst said a buy-out was more likely than takeover by another company. `Schroders has been trying to sell Senior’s businesses but hasn’t found a buyer,’ he said.
Chief executive Andrew Parrish is concerned by a 50% drop in the share price of Senior over the past two years. A buy-out at this stage would allow the management team to buy the company at a low price and benefit from any recovery.
Further buy-outs could follow if the bid is successful. `The engineering sector has a long list of small and medium-sized companies which haven’t performed,’ said the analyst. `I would expect more of them to go private.’
Over the past few years, Senior has gone along with the stock market fashion for focusing on core strengths. But a report published this week by accountant Ernst & Young says focus on its own will not be enough to guarantee success.
Nick Legh, corporate finance partner at Ernst & Young, said: `To succeed, management teams have to back winners as they sort out their business portfolios. Then they have to manage those chosen businesses in an increasingly competitive environment.’
The report highlights seven engineering companies which outperformed the FTSE all-share index over the past year, including Cookson Group, TI Group and Invensys.
Shares in all three companies held up this week, despite falls of around 10% at other engineering groups, including IMI and Mayflower.
The successful companies identified by Ernst & Young have all undergone restructuring over the past five years. TI, for example, has acquired 21 companies for a total of over £1.5bn and sold 11 subsidiaries for over £400m.
TI operates across four market sectors, so might not be regarded as focused in the traditional sense. However, the report praises the company for being strong in growth niches, such as fluid delivery systems, and for consistently achieving profit growth of over 10%.