Intertek is going to be broken up: the question is by whom
A split should unlock value
Great minds think alike. Intertek, which carries out safety testing and certification, is weighing plans to splice off its less profitable energy and infrastructure unit, via a sale or demerger. It has rebuffed an offer from Swedish private equity firm EQT, which wants to buy the whole lot for £10.6bn, including debt, and carry out much the same slicing strategy.
It’s not possible to tell who had the lightbulb moment first. EQT launched its takeover bid on April 10; Intertek spelt out its plans a few days later but said discussions had been under way for some time. It also categorically rebuffed EQT’s advances.
Either way, a split should unlock value. For one thing, the two business lines are very different: each has its own labs and software. And, for another, the combination is not much loved by the market.
Before the news, Intertek’s enterprise value was just north of £7bn. Yet putting its testing and assurance business on 15 times this year’s estimated operating profit — in line with European rivals, which trade at somewhere between 13 and 17 times — means it, alone, would be worth £7.3bn. A more modest multiple of 10 for energy and infrastructure, whose margins are only half the size of the testing business, values that at £1.7bn, putting the combination at £9bn.
That’s a lot better than the shares were trading at last week. But, of course, EQT’s offer trumps that — as well as offering jam today to those investors who lack faith in Intertek’s ability to pull off such a transaction.
Indeed, the group’s record isn’t one of unalloyed success when it comes to M&A. It has done plenty of small bolt-on deals, including a handful last year. But efforts to play consolidator in the industry, which does everything from testing toys’ safety to certifying oil-drilling kit, hit a roadblock when French peer Bureau Veritas spurned it in favour of tying up with SGS of Switzerland — another deal that ultimately fell apart.
After their jump, Intertek’s shares are now trading some 3 per cent below EQT’s £51.50 per share offer, implying that investors don’t yet see much chance of it plonking down a whole lot more cash before its put-up-or-shut-up deadline in mid-May — or of another bidder being flushed out.
Still, the board has some levers to try to squeeze a little bit extra out of its private equity suitor. EQT’s offer — while generous beside last week’s share price — is less than 10 per cent higher than where shares were trading in early March, before disappointing growth rates pummelled them. It might not take much to produce a deal that’s harder for the company to refuse.