Chemring, Carlyle get more time to agree on deal

Fri Oct 12, 2012 6:14am EDT

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(Reuters) - U.S. private equity company Carlyle Group (CG.O) has been granted more time by the UK Takeover Panel to hammer out a deal to buy Chemring Group Plc (CHG.L), which makes defense equipment such as flares and explosive device detectors.

Carlyle now has until November 9 to either bid for Chemring or walk away. This is the second time that Carlyle has been granted an extension after having secured an extension in September.

A counter bid from an industry buyer was unlikely and negotiations were likely centered on price, said Edison Investment Research analyst Roger Johnston.

He said a price around 400 pence per share, a premium of 19 percent to Thursday's closing price, would be enough to clinch the deal. That would value the company at 773 million pounds ($1.2 billion).

"Carlyle will feel under no pressure to bid high while Chemring management will not want to go out with a whimper so this will be a finely balanced negotiation," Johnston said.

In the midst of negotiations, Chemring issued a profit warning, citing errors in a new resource planning system at a unit in Florida and a delay in starting production of a system that helps troops breach obstacles like minefields.

A person familiar with the matter said the profit warning had delayed the process as Carlyle considered the new numbers but he added that it would be pointless extending the deadline if the companies didn't think a deal could be reached.

Along with its peers, Chemring faces lower defense spending in the United States and Europe as governments struggle to rein in budget deficits.

Defense industry deals can be fraught, as shown by the collapsed talks between industry giants BAE Systems Plc (BAES.L) and Airbus parent company EADS EAD.PA this week.

But an analyst said the same level of complication was not evident in the proposed sale of Chemring.

"It is unclear why completing this deal is taking so long," Oriel Securities analyst Guy Brown said in a note. "However, the extension indicates that management and the board are keen to complete this deal."

Chemring revealed on August 17 that it had received a highly preliminary expression of interest from Carlyle. Carlyle initially had until September 14 to make a bid for Chemring or pull out but that deadline was then extended to Friday.

"It's a good thing that they're still talking therefore there's still potentially a deal on the table and it's a bad thing because it's taking such a long time to sort it out," said Paul Mumford, senior investment manager at Cavendish Asset Management, which owns 2.3 million pounds of Chemring stock.

"We just have to be patient again, unfortunately. I don't think I would be charging in to buy any shares at the moment but on the other hand I'd just sit there and await developments."

Chemring shares were trading flat at 336.5 pence at 0904 GMT on the London Stock Exchange on Friday.

The shares, which spiked on August 17 on investor enthusiasm over a deal, gave up most of those gains after the profit warning raised fears that Carlyle might walk away.

(Reporting by Abhishek Takle in Bangalore and Anjuli Davies in London; Editing by Don Sebastian)

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