Nilfisk shareholders back possible merger, see suitors beyond Tennant
08 JAN 2018
- Second tier players could make good alternative targets
- Management under pressure to act post-demerger
Investors in Nilfisk [CPH:NLFSK] welcome the prospect of a merger, according to three minority shareholders, but management should look beyond a tie-up with US-based rival Tennant [NYSE:TNC], two of them added.
Nilfisk has some US operations, but is not very big in that market, so a merger with Tennant, the biggest player in North America, would be a good fit in terms of geographical expansion, the third shareholder said.
However, it is difficult to see how the deal would be structured, the first shareholder cautioned, adding that Tennant has not been interested in merger overtures in the past. A more lucrative deal in the mid-market could well provide better long-term value, the second shareholder said. It is, however, a positive thing that Nilfisk is looking at a merger, all three shareholders agreed.
Activist fund
PrimeStone, which holds a stake of around 5% in both companies, launched a
campaign for a merger between Nilfisk and Tennant in December. In response
Tennant has said it will "will carefully evaluate PrimeStone's views and look forward to discussing with all our shareholders our core strategy to continue driving earnings growth and shareholder value going forward".
Nilfisk said its "strategy continues to be to simplify its business and to grow organically and through M&A".
While the merger makes sense in many ways, the second shareholder questioned PrimeStone’s motives as a cross-shareholder, noting that the fund is likely more interested in short-term gain.
About 18 months ago, Nilfisk broadened its business in the professional cleaning equipment market, which allows it to become a consolidator, according to the second shareholder. In 2015-2016, Nilfisk launched various initiatives to support its "Accelerate" programme, designed to "drive growth and further consolidate its leading position in the industry" according to its
2016 annual report. The programme also aims to increase the company’s "attention to the midmarket, where we see significant growth potential," the report adds.
While the top end of the market is fairly concentrated, the second tier of professional cleaning tools companies is much more fragmented and offers better opportunities for long-term value creation, he said, declining to name any potential targets.
There could well be a better strategic fit out there than Tennant, the first shareholder agreed. Nilfisk’s management team will need to carefully consider its options, he said.
At Nilfisk, shares jumped from just below DKK 300 (EUR 40) to over DKK 350 (EUR 47) after PrimeStone’s proposal. Tennant is trading at just below USD 75 per share, up from USD 63 before the announcement. The elevated stock price shows that the market either does expect the Tennant deal to go through, or it at least expects another merger to be on the cards, the first shareholder noted.
Management needs to be proactive at this stage, the second shareholder said, but added that they have taken significant steps already and should be given breathing space to “get on with it”.
Tennant recalcitrant in the past
Nilfisk demerged from cables business NKT [CPH:NKT] in October 2017. While the management team is diligent, the demerger took longer than many investors would have liked to see, the second shareholder said. Now that it has broken loose from the cables business, management knows the pressure to deliver is on again, he said.
Prior to the demerger, NKT floated the idea of a merger with Tennant, according to press reports. A deal might have been difficult to pull off with the cables business still in the mix, the third shareholder added.
A merger with Tennant is not a new idea, the first and second shareholder said. As far back as 2007, then-NKT Managing Director Thomas Hofman-Bang said a merger with a larger competitor would be on the cards in the future during the capital markets day. He reiterated the sentiment in 2010 and 2012, according to local press reports. The reports named Tennant, German privately owned Kärcher and Hako, all mentioned in PrimeStone’s presentation as competitors in the top-tier cleaning tools market, as potential partners.
Privately owned Kärcher is unlikely to be interested in merging with a listed company, the second shareholder said. Kärcher states on its website that its priority “is to maintain our financial independence and decision-making autonomy” and that “organic growth takes precedence over acquisition”.
Both the first and second shareholder pointed out that Tennant has not seemed keen on a merger in the past. In 2014, Tennant’s CFO Tom Paulson told this news service that the company has considered the possibility of “working” with big cleaning-technology manufacturers, but believes it can provide more value for its shareholders as an independent organisation.
If the terms are right, then a merger with Tennant should not be discounted, the second shareholder said, but added that it is not the only solution out there.
The first shareholder is expecting communication from the company on its plans soon and is happy to wait and see what comes of the proposal.
Nilfisk, PrimeStone and Tennant all declined to comment.