Weir
Will Weir bid for Outotec? Not likely
* Weir bid for Outotec not likely in our view
Press reports (incl. The Times) have suggested that Weir is considering a bid for Finnish
mining equipment company Outotec. In our view while feasible from a financial
perspective, the industrial logic appears less clear. Outotec provides engineering
services to mining companies (a bit like an EPC) and as such has a different business
model to Weir who sell product and then farm the aftermarket. We believe that the
Weir management team are keen to continue an acquisitive expansion strategy but
acquisitions in the unconventional oil & gas flow control segment may be more
feasible. Weir officially are making "no comment".
* The maths on an Outotec bid
Outotec has an €1.4bn market cap (c£1.1bn) and on consensus estimates will have net
cash of c€95m at end 2014E, suggesting an overall staring EV of c£1bn. It is on a
2015E consensus EV/EBIT of c13x, although on more cautious UBS estimates this is
more like 15x. "thisismoney.co.uk" suggests a possible bid at €12 per share, which
would equate to an EV of over €2bn and consensus EV/EBIT of c21x15E based on
consensus and c24x on UBSe – this looks too high in our view and would suggest no
EPS accretion. If synergies at 5% of sales were possible, then the EV/EBIT could fall to
more like 12-13x and the deal could be c10% EPS accretive. However, the industrial
logic on the deal would appear less than on the recent Metso bid and as such it is
questionable whether this level of synergies could be achieved.
* Could Weir afford it – Yes, in our view
We estimate that Weir could add c£1bn of debt temporarily by going to c3x net debt /
ebitda suggesting that a capital increase may be needed, but not a very large one.
* Valuation: £28 price target
Weir price target set on 14x EV/EBITA 2014E.