DEALTALK-Metso bid could stir rivals and make Weir a target

Wed Apr 2, 2014 11:46am EDT

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* Weir seeks Metso deal, but key Metso shareholder against

* Failure could make Weir a takeover target - bankers

* Mid-sized engineers seen ripe for M&A, but valuations high

By Anjuli Davies and Stephen Eisenhammer

LONDON, April 2 (Reuters) - British engineer Weir Group's proposed tie-up with Finnish rival Metso could trigger a wave of dealmaking in the sector and leave Weir itself vulnerable to a takeover if its plan falls through, bankers and analysts said.

Industry sources say mid-sized engineers which supply pumps and valves to mining, oil and construction firms are ripe for consolidation in order to provide a wider range, and a larger scale, of kit and services to cost-conscious customers.

But in a sector crowded with specialised players of similar size and financial strength, it is difficult to identify predator and prey. Britain's IMI, Switzerland's Sulzer and Metso all have market values of between $5 billion and $7 billion, while Weir is just a bit bigger at $9 billion.

"It is very difficult to predict who's going to make the next move as every player is a potential target and a possible consolidator at the same time," one sector banker told Reuters, speaking on condition of anonymity.

Weir's approach to Metso, announced on Tuesday, looks in danger of failing as Finland's state fund Solidium, which owns 11 percent of Metso, has come out against a merger.

This could leave the British engineer, which has a lucrative position in the U.S. shale market, vulnerable to an approach, as it could galvanise interested parties to make a bid before Weir puts itself beyond reach through an acquisition of its own.

JACKS IN THE LAND OF GIANTS

"Definitely this could now be a catalyst for someone to come in for Weir," another sector banker told Reuters.

Potential suitors include industry heavyweights such as General Electric and Honeywell, the banker said, adding: "every banker on the planet is asking everyone if they want to go after Weir or if they now want to go after Metso."

But with mostly healthy finances and the opportunity to gain scale and synergies, mid-sized firms could lead the charge.

"The prospect of the (Weir-Metso) deal also indicates the ringing of the bell in terms of mid-cap industrials, the 'Jacks in the land of the Giants' starting to use their balance sheets to develop their global platforms and generate considerable synergies," analysts at Canaccord wrote in a note to clients.

A major sticking point, however, could be price.

"Most of these companies like Rotork, IMI, GKN and Weir ... have so far been protected by their rich valuations," a third banker said.

"Natural buyers like GE (General Electric) are busy studying targets in many other sectors where they already operate and which might be cheaper."

Mid-cap industrial firms have an average price to earnings ratio of around 15, according to Thomson Reuters data, above a ratio of 12.6 for the oil and gas services sector, where GE has been particularly acquisitive.

Weir Group shares have surged 39 percent over the past two years versus a 13.5 percent rise in the UK's benchmark FTSE 100 over the same period, whilst IMI shares have risen 54 percent in that time. (Additional reporting by Sophie Sassard; Editing by Mark Potter)

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