Volvo Construction Equipment could attract range of interest if up for sale – bankers - Merger Market
* Management might try to wait out China downturn before move
* Sale would follow IT, Aero divests; Volvo Penta also a candidate
* Activist Cevian bought stake in 2006, discussed corporate structure
AB Volvo’s [STO:VOLV-B] Construction Equipment business should attract a range of strategic interest if management were to explore a sale of the unit, several sector bankers said.
Strategics based in China, North America and Europe would likely take interest, they said. However, management might try and wait for profitability to improve at the company’s Construction Equipment arm before considering any move. This would include waiting out a downturn in the Chinese construction market, the bankers said.
A report in January 2016 suggested Volvo shareholders may step up efforts pushing for a split of the group if profitability did not improve. The company has long been considered a break-up candidate after activist shareholder Cevian Capital bought into the stock in 2006 and discussed structural changes with management.
A slim-down would allow Volvo to better focus on its core Trucks business, one of the bankers said. A case could be made for Volvo to continue with exits of all its non-Trucks operations, a sector analyst noted. It could make sense to sell or spin-off Construction Equipment due to it having higher end-market volatility than Volvo’s other businesses, the analyst said. Volvo declined to comment.
Since Cevian entered, Volvo has sold its IT and Aero divisions. As reported, it was rumoured to have considered selling its Buses division, with 7% of group sales, earlier this year. Marine engines business Volvo Penta, with 3% of group sales, is another clear divestment candidate, a banker said.
The size of Volvo’s construction equipment business has made it the main focal point for break-up proponents. The division accounted for 16% of group net revenues in 2015. Both a sale and spin-off of the unit have been suggested in recent years.
If Volvo does go down the sale route, it should not see a shortage of interested parties for the construction equipment division, bankers said. It is the market leader in China, although placed fourth or fifth in Europe and the US, meaning consolidation might be required for the unit, the analyst said.
The construction sector is at a low point, meaning companies will be cautious with large scale buys, one of the bankers said. However, the Volvo brand name remains attractive, he added. An Asian player interested in entering the European market might be more likely to pay a premium, the analyst suggested.
China’s Zoomlion [SHE:000157] and Illinois, US-headquartered Caterpillar [NYSE:CAT] are examples of industry players that might show interest, several bankers said. Sany [SHA:600031] is another potential buyer in the sector, one added.
Japanese players such as Komatsu [TYO:6301] and Hitachi [TYO:6501] also operate in the sector and could be potential buyers, two bankers said. Netherlands-based CNH Industrial [NYSE:CNHI] could also show interest, two other bankers suggested.
A spin-off is another option mooted in the past. Construction Equipment would have an EV of around SEK 25bn (EUR 2.64bn), making it big enough to trade well as a separate company on the stock exchange, the analyst said. Multiples in the sector are currently around 9x EBITDA, one banker said.
The unit has seen declining sales and profitability in the last few years. Net sales of SEK 63.5bn (EUR 6.7bn) with an operating margin of 10.7% in 2011 fell to net sales of SEK 51.0bn (EUR 5.4bn) with an operating margin of 4.1% in 2015. However, profitability has risen since its low point in 2014, when the unit’s operating margin was 2.3% with net sales of SEK 52.9bn.
Volvo introduced a series of cost reduction measures for the Construction Equipment unit in 2015 as it faced up to a 48% decline in its Chinese market. Changes also included a new corporate governance structure for the business and a new sales approach.