Reports that engineering group Smiths could be interested in a near £500m deal in France has given a boost to the business.
On their first day after being demoted from the FTSE 100 to the 250 index, Smiths’ shares have climbed 11p to £11.17 on talk it could pay £470m for the Morpho security business put up for sale by owner Safran. Analysts at Stifel said:
The Sunday Times yesterday reported that Smiths is bidding for the detection business of Safran’s Morpho security unit, and suggested a purchase price of £470m. Safran last week confirmed that this business was for sale, and that it was in discussions with a number of parties.
We believe it is likely that Smiths is interested, given the significant market position of Morpho and the complementary mix of technologies (Morpho in tomography, Smiths in X-ray). Should this transaction take place, we believe that it would be an attractive step, securing clear global leadership for Smiths in a detection market seeing a resumption of growth, and in which Smiths appears to have resolved its own performance issues.
A deal at the suggested price would push debt metrics slightly over the previous management’s target range (1.5-2.0 times net debt/EBITDA), but we believe that it should be seen as part of a larger portfolio review process, which is likely to involve disposals as well, so that this spike in debt would prove temporary.
Last week the company revealed a 28% rise in half year profits to £168m and its new chief executive ruled out a break-up of the business, whose divisions include medical, detection and oil and gas equipment.
