Zoomlion nears completion of Terex financing; could table formal bid in a couple of weeks
* Aims for Terex to overturn Konecranes recommendation
* Funding to comprise cash on hand plus on- and offshore debt
* SAFE approval needed
Zoomlion Heavy Industry [SHE: 000157, HKG: 1157] is close to completing the necessary financing to be in a position to turn its preliminary rival USD 31 per share cash offer for US-based Terex [NYSE: TEX] into a binding one, two sources close to the process said.
The China-based heavy equipment manufacturer has received commitments for more money than needed to cover its competing offer for Terex and is now in the process of deciding how to divvy up its borrowings, one of the sources said. It should be able to approach the Terex board in a couple of weeks with the aim of having it agree to and recommend Zoomlion’s higher offer, this first source said.
The Terex board is currently recommending an all-share offer from Finnish crane manufacturer Konecranes [HEL: KCR1V], which as of May 9 had an implied value of USD 18.26 per share. But the US company is also in talks with Zoomlion to determine if it can obtain a fully financed proposal with a high degree of closing certainty. Talks are focused on Zoomlion’s certainty of financing, shareholder approval, governmental approvals and the details of a reverse break-up fee.
According to the first source, Zoomlion will use about USD 1.5bn of cash from its balance sheet and borrow the remainder. Its preliminary offer has an implied enterprise value of about USD 4.87bn, based on 108.5m outstanding shares and including USD 1.51bn of net debt as of 31 March 2016, Dealreporter analytics show.
The second source said the deal will be financed with approximately one-third cash, two-thirds bank lending and added that Zoomlion is close to finalising an agreement with China Development Bank for a CNY 20bn (USD 3.08bn) CDB-led loan that will come with a 1%-2% government interest rate subsidy.
The Changsha-based company is planning to raise another CNY 10bn from overseas sources to reduce the risks associated with State Administration of Foreign Exchange (SAFE) approvals for transferring money out of China, the same source said. Not all of that money will be used towards the Terex acquisition, though. Some of it will be set aside for other deals that are currently in the works, or that may be explored in the future, the second source said.
Chinese outbound deals exposed to SAFE are being watched closely by advisors and investors amid concern the regulator has slowed down its approval process since February, as reported.
Wants to maximise offshore borrowing
Other Chinese banks are expected to participate in the CDB-led loan and part of the money will be provided by overseas branches of these banks. According to the second source, Zoomlion was previously in talks with Bank of China’s Milan branch although talks ended.
The first source declined to provide a breakdown, but noted that Zoomlion wants to maximise its offshore borrowing to make Terex’s board comfortable that a potential deal won’t be tripped up by SAFE.
These risks won’t be eliminated altogether though, as Zoomlion will borrow some money onshore and will also need SAFE approval to exchange its balance sheet cash into US dollars, this source added.
In the event Terex changes its recommendation, Konecranes may terminate the agreement and receive a fee equal to USD 37m, as previously reported.
A source familiar with the situation told this news service in April that Konecranes is “fully prepared” for discussions about alternatives if Terex deems Zoomlion's latest offer superior. But Konecranes’ board will not destroy value for its own shareholders just to outdo Zoomlion, the source familiar cautioned.
Terex has faced deteriorating quarterly sales and earnings since Konecranes’ offer in August 2015 and as the two companies’ share prices have fallen, the implied value of the all-stock merger, which will give Terex shareholders 0.8 share in Konecranes for each of their Terex shares, has come down. On top of that, US tax reforms flagged on 27 April, would erase some EUR 32m (USD 36.5m) in post-income benefits from the Terex/Konecranes tie-up, as reported.
Zoomlion, on 27 January, announced it had made a non-binding USD 30 per share cash proposal for Terex and in mid-February said it had a concrete financing plan comprising a 40:60 mix of cash on hand and bank loans. It also noted that it had received letters of support from relevant banks.
On 24 March, the Chinese company increased its non-binding offer price to USD 31 per share. It has made no further public announcements about the financing structure since then.
1Q earnings drop
Zoomlion had USD 1.77bn of cash and cash equivalents at the end of 2015. By the end of 1Q16 this had decreased slightly to CNY 10.5bn (USD 1.61bn), according to its latest results announcement.
The company’s 1Q16 results were worse than analysts had expected, with a 20% decrease in operating income year-on-year and several other key measures also down.
A person in Zoomlion’s investor relations department said the company has abundant credit lines with lenders both in China and abroad. According to its 2015 annual report, unused credit facilities stood at more than CNY 79.5bn at the end of last year.
Equity funding is not considered an option since Zoomlion is trading below book value.
At the end of 1Q16, the company had net debt of CNY 14.7bn (CNY 1.1bn of that matured on 20 April), which together with a 12-month rolling EBITDA of CNY 2.1bn put its operating net leverage at 6.7x EBITDA.
If Zoomlion were to take on an additional CNY 30bn of debt, the net leverage would rise to 7.5x on a pro-forma basis (when Terex financials are consolidated with Zoomlion after acquisition), Dealreporter analytics show.
Terex shares closed at USD 23.41 on Monday, representing a 28.2% premium over Konecranes’ implied offer price and a 24.5% discount to Zoomlion’s preliminary offer.
Terex declined to comment