July 12, 2013 / 1:56 PM / 4 years ago

GEA to target private equity in unit sale - sources

3 Min Read

FRANKFURT, July 12 (Reuters) - German industrial group GEA will target private equity groups in its push to sell its heat exchanger unit, hoping to fetch a price of more than 1.3 billion euros ($1.7 billion), three people familiar with the situation said.

GEA, which is being advised by Deutsche Bank, will approach investors such as First Reserve, CVC, Blackstone, Permira, Cinven and Advent, the sources said, speaking on condition of anonymity.

"I do not see any GEA peer bidding for the unit as a whole," one of the people said on Friday.

GEA's heat exchanger business, its second largest by revenue, offers products ranging from air conditioning systems to cooling towers but has limited synergies with its other operations. Last month, GEA said it aims to focus on its highly stable business with the food industry.

The auction process for the unit dubbed HX is still at an early stage, with information packages likely to be sent out to potential bidders in autumn and tentative bids expected several weeks thereafter, the sources said.

"The sales process is being set up according to plan," a spokesman for GEA said, while Deutsche Bank and the investors declined to comment.

"The quality of HX's sub-units is quite diverse," a banker close to a potential bidder said.

GEA's plate heat exchangers business - mainly used for food and drink production - will easily attract attention, he said.

Interest will be lower for the heating, ventilation and air conditioning equipment (HVAC) business, he said, due to its strong connection to the cyclical construction industry.

"Cooling towers will be a tough sell," he added.

To coax investors into buying the unit as a whole, GEA will likely have to offer a discount to the valuation of peers and could sell HX at 6-8 times earnings before interest, tax, depreciation and amortisation (EBITDA), the sources said.

Sweden-based peer Alfa Laval, which competes with GEA's unit in the area of plate heat exchangers, trades at 11 times, while U.S.-based SPX, which of late unsuccessfully tried to divest its own cooling tower unit, trades at a multiple of 8.9.

Another issue for prospective buyers is that they will have to line up banks that can fund the debt guarantees that suppliers of the industry's large machinery generally have to provide. These are to cover pre-installation performance guarantees and warranties once the machines have started operating.

Any buyer would probably have to write a large equity cheque and would not be able to use large amounts of debt to finance the acquisition to convince banks to supply the guarantees, one of the sources said.

GEA Heat Exchangers posted revenues of 1.61 billion euros in 2012 and EBITDA of 167 million euros. Its order intake dropped nearly 12 percent on a like-for-like basis last year.

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