Smiths Industries Aerospace has made a decisive move to break into the aviation equipment big league with a surprise takeover bid by its parent company for UK engineering conglomerate the TI Group. Approval of the deal by the two companies' shareholders will see aerospace sales at Smiths double to £1.1 billion ($1.5 billion).
The proposed £1.77 billion takeover of TI, which owns aerospace and defence supplier Dowty as well as a series of other engineering businesses, will form a combined operation, to be called SI Group, with a market capitalisation of £4.5 billion and annual sales of £3 billion. Smiths shareholders will own 57.6% in the new SI Group with TI stockholders owning 42.4%.
The deal was not well received in financial circles with Smiths shares dropping by several percent as the company's management struggled to justify the industrial logic of "bolting on" a range of diverse, seemingly non-synergistic businesses to Smiths' precision equipment activities in the avionics and medical fields.
The lukewarm market reception can also be explained by the low confidence in engineering companies by the UK stock market and the unfashionable "conglomerate" status that the TI buy brings Smiths.
The 'For Sale' sign has been up at TI's Abingdon, Oxfordshire headquarters for some time. The share price halved in the last two years despite an aggressive acquisition strategy which saw it double its revenue and achieve double digit profitability for all of its core businesses. The mismatch between its performance and share value finally prompted the company to sell.
An announcement that TI was to seek a buyer for its automotive division, a disposal which should fetch around £1.2 billion and wipe out TI's net debt, triggered the Smiths takeover, although talks had been going on for some time.
The Dowty operations had been in Smiths' sights for nearly four years before the opportunity arose. BFGoodrich and the UK's fast expanding BBA Group were also believed to have shown an interest in TI and the weakness of Smiths' shares has prompted speculation that a rival bidder may yet emerge.
The deal will form a portfolio of aerospace businesses incorporating Smiths' flight management systems and electrical power management systems, recently boosted by acquisitions such as BAE Systems' Actuation Systems division and TI's Dowty units, which produce hydraulics and actuation systems, turbine engine components, tubular systems, aerostructures and propellers. The Dowty unit recorded operating profits of £72 million on sales of £568 million in 1999 while Smiths' Aerospace division produced profits of £108 million on revenues of £583.4 million.
Aside from aerospace, the TI acquisition also sees Smiths absorb TI's Specialty Polymer Products, of which about 10% of sales is aerospace-related, with applications including seals for airframe doors and hatches; plus the non-aerospace sealing businesses of TI's John Crane unit.
A merger will see the combined group close to becoming one of the top 25 aerospace companies in the world rated on turnover. Assuming the share price recovers, the size and diversity of products may also make Smiths - which has one of the highest operating margins in the business - less digestible as a takeover target itself.
While some are terming it a dash for growth, managing director at Smiths Industries Aerospace Dr John Ferrie says the move "means we are the right kind of size to play in the next round of aerospace rationalisation" establishing the company as a leading aircraft systems supplier. Ferrie confirmed that Smiths would continue its strategy of acquiring niche companies to bolt onto existing businesses, while also looking for further major merger opportunities.
The Smiths Aerospace boss says that while the product line up does not fit as well as some previous acquisitions, the core competency of the two groups would allow them to exploit "new business opportunities neither would have attempted alone". He also denied there was no synergy between the operations, pointing to the actuator businesses of the two companies as the prime example.
With aircraft manufacturers increasingly looking for contractors to provide packages of work, rather than individual items, Ferrie also reckons the combination of expertise in actuators, sensors, control and structural components will pay dividends. The diverse nature of the new grouping, assuming it gets shareholder approval, could also lead to a fall-out of non-core activities, although Ferrie says it is "too early to talk about reshaping the business".
Smiths Industries chief executive Keith Butler-Wheelhouse says the deal will only realise about £25 million in savings. However, the merger is "not about cost saving and job cuts; its more about market reach".
Source: Flight International
