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Smiths pays nearly £500m for US airport and nuclear security business

Discussion in 'Market News' started by Lily, Apr 21, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Deal boosts engineering group’s detection business, and could lead to disposals

    Supplying security systems to help detect threats against airports, nuclear power plants and military and goverment buildings is big business these days, and UK group Smiths has expanded its reach with a $710m (£493m) deal to buy California-based Morpho Detection.

    The acquisition, from French engineering group Safran, is Smiths’ first deal for a number of years and comes as a new management team gets to grips with the business. Analysts believe Smiths sell off unwanted operations to reduce borrowings after the cash and debt funded deal. Smiths chief executive Andy Reynolds Smith said:

    The threat environment for people and critical infrastructure around the world is constantly evolving and becoming more complex and sophisticated. The response, to keep people safe and the world running, demands cutting-edge technology and cost-efficient solutions.

    Morpho Detection is a high quality business with a strong management team, and I am convinced that this combination provides a compelling competitive platform for product, service and technology leadership.

    This [deal] was suggested in the press some weeks ago, and we commented at that time that we saw this as a positive strategic move, if Smiths were able to secure a deal. That remains our view. This acquisition will give Smiths Detection clear global leadership across all key geographies and technologies, and a much expanded aftermarket revenue stream.

    The deal is being funded out of existing cash and debt facilities; we estimate that this will push net debt/EBITDA to 2.2 times, but we believe that the group is also looking at asset and business disposals as part of the portfolio review; this debt level is thus likely to be temporary. We think the main positive of this announcement is that it shows the new management team returning to active portfolio management – a key part of our buy case on the stock.

    The vibe has changed with the arrival of the new management team and Morpho Detection is set to be the first sizeable acquisition for years.

    [Morpho] looks a better business than Smiths Detection and less dependent on new project work (Morpho $320m revenue and 18% operating margin; Smiths Detection £467m revenue and 11.8% operating margin). This may not be the area where shareholders would necessarily have wanted expansion, in view of the mixed record, and the deal will take leverage to at least 2 times EBITDA (the pro forma 2 times is based on debt before over £100m of payments into the pension funds), meaning firepower has been used up for the time being. Perhaps this brings forward the time when some disposals will finally be achieved.

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