Konecranes should resist hiking Terex offer if Zoomlion bumps – top 10 shareholder
Konecranes [HEL:KCR1V] would be best placed to stand back “rather than overpay” for Terex [NYSE:TEX] if rival Zoomlion Heavy Industry Science & Technology [SHE:000157] approaches with a bid higher than USD 30 per share, according to a longstanding top-10 shareholder in the Finnish group.
There is “no intention” to engage in conflict with the Chinese government over the situation, Konecranes Chairman Stig Gustavson told this news service. Zoomlion secured Chinese government approval to make its unsolicited approach for Terex.
Gustavson declined to comment on the “hypothetical situation” of a higher Zoomlion offer. However, it is “highly questionable” that Zoomlion can mount a formal bid, he argued.
There are three likely scenarios as things stand, the shareholder said: Terex and Konecranes merge as planned; Zoomlion approaches with a significantly higher bid, including a large break fee held in escrow, at such a premium Terex shareholders would have to accept; or Zoomlion succeeds at USD 30 or higher, and invites Konecranes to participate in a break-up of Terex, in part potentially to address US political concerns.
A Terex/Zoomlion tie-up would likely face review by the Committee on Foreign Investment in the United States (CFIUS) given the target’s activities in or close to government agencies, military bases, ports and other strategic sites, this news service has previously reported.
However, the CFIUS risk inherent in a Zoomlion approach has been overplayed, the top-10 Konecranes shareholder said. Only 2%-3% of Terex’s activities would be likely to attract CFIUS’ attention, he added.
There is no concrete offer from Zoomlion and Terex cannot pull out of its all-stock agreement with Konecranes before a planned shareholder vote, a source familiar with the situation said. At this point, Konecranes should hold steady with its existing offer and refrain from proposing Terex carve-outs, the source added.
Konecranes is chiefly interested in Terex for its 2011 acquisition of Demag Cranes, the shareholder said. His preferred endgame is the Terex/Konecranes deal as proposed, as it is “so accretive”. But a carve-up where the Finnish group secures the assets it wants from a Zoomlion deal would be a reasonable scenario, he added.
Terex has been trying to exit the construction equipment business for some time and Konecranes would likely continue with disposal efforts in that regard, an independent industry executive said.
Construction equipment is hard to define, as over the years many small unrelated businesses and products were thrown into this Terex segment, the executive said. The biggest problem Terex has is that none of these activities fit together; distribution systems, sales teams and customers are all different, so no-one will want the segment as a whole, he added.
Konecranes should end up selling “most of” Terex’s non-crane operations, the shareholder said. It does not want any heavy construction assets without a top-rate service stream, he said.
The asset sales would be part of the package making a Terex/Konecranes tie-up so attractive, the shareholder argued. If private equity takes some USD 1.5bn in assets, that would form the bedrock of the planned buyback programme of the same amount, he said.
Assuming Konecranes can offload high-cost-base assets with low tax leakage, investors will be looking at a 5% dividend yield and a USD 1.5bn buyback, the shareholder said. Though Zoomlion’s bid looks decent on paper, if synergies are also forthcoming from Terex/Konecranes, it is difficult to see whether the Chinese bid adds very much for Terex shareholders for the deal risk it carries, he argued.
Terex and Zoomlion were not immediately available for comment.