Fitch: Volvo Deals Signal Capital Goods Retrenchment in 2014

Tue Dec 10, 2013 11:13am EST

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(The following statement was released by the rating agency) LONDON, December 10 (Fitch) Truck manufacturer Volvo's sale of an equipment rental unit and acquisition of a mining-equipment business signal another round of M&A by European capital goods companies in 2014 as they focus on core or high-return businesses, Fitch Ratings says. The deal marks a shift in M&A activity towards portfolio realignments from opportunistic growth investments over previous years. We believe the focus on exiting underperforming businesses or those in the most competitive markets will strengthen companies' credit profiles in the long term by improving stability and reducing leverage. However, any short-term benefit will be limited and there is a risk that large concurrent acquisitions and disposals could divert management attention away from day-to-day operations. The retrenchment to core businesses is a continuation of defensive strategies adopted by capital goods companies in the face of a challenging operating environment. While the eurozone is gradually returning to growth, we believe it will take time for improving consumer and business confidence to translate into new orders for capital goods. At the same time the sector is facing slowing growth in emerging markets. Refocusing business portfolios in the face of these headwinds is a multi-year process and is often subject to delays. Philips' deal to sell consumer electronics operations to Funai Electric has collapsed, although the group has made progress in shifting its portfolio towards higher-margin healthcare markets and reducing its exposure to consumer electronics. Siemens' spin-off and listing of OSRAM was equally marked by delays for years before concluding in mid-2013. Other capital goods companies in the process of refocusing their portfolios include GEA, which is spinning off its operations in the highly competitive heat-exchanger market and looking for acquisitions in the food and beverage equipment sector, where it is already strong. Siemens is also looking to sell its baggage handling and postal automation operations and has already sold its water treatment business. Buyers for the units up for sale are likely to be either companies seeking scale in a competitive market (for example Funai's now-halted deal with Philips) or financial buyers such as private equity firm Platinum Equity, which is buying Volvo Rents in North America. The Volvo unit is currently loss-making and the sale will support cash generation. The sale proceeds will also dampen the pressure on credit metrics from the Dongfeng Commercial Vehicle and Terex acquisitions. Terex will further expand Volvo's presence in China and its light mining rigid haulers will complement the group's leading position in articulated haulers. However, we remain cautious about the sluggish outlook for new mining equipment. Fitch plans to publish an Outlook Report for the capital goods sector in the next few days, which will provide more details on the trends and key risks we expect for the sector in 2014. Contact: Ha-Anh Bui Director Corporates +44 20 3530 1566 Fitch Ratings Limited 30 North Colonnade London E14 5GN Emmanuel Bulle Senior Director Corporates +34 93 323 8411 Simon Kennedy Director Fitch Wire +44 20 3530 1387 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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