European Debt,Currency Seen Aiding Emerson's Bid For Chloride
07 May 2010 - 5:50AM
Dow Jones News
Europe's debt crisis and its weakening currency are likely to
provide momentum for Emerson Electric Co.'s (EMR) renewed pursuit
of Chloride Group PLC (CHLD.LN), analysts say.
U.K.-based Chloride, which provides backup power systems for
computer-data centers, rejected Emerson's buyout attempt in 2008.
But the St. Louis-based diversified industrial company has
resurrected its interest in Chloride, disclosing last week that it
offered to pay about $1.1 billion, or about GBP723 million, for the
company.
Chloride executives dismissed the offer, which amounted to about
$4.19 a share, or 275 pence, as too low. But industry analysts
noted their rejection didn't rule out consideration of additional
proposals. Economic and market conditions could persuade Chloride
executives to take another look at a tie-up with Emerson.
With 64% of Chloride's annual revenue coming from Europe,
analysts say the company is susceptible to sluggish demand for its
products in the coming years. European economic growth is expected
to lag other regions, including the U.S., as countries resort to
tax increases and deep cuts in government spending to fight off
budget deficits and escalating debt costs. While the crisis has
eroded the value of the euro against other currencies, it's also
making exports from European Union countries less expensive for
foreign buyers. Just 16% of Chloride's revenue comes from Asia and
11% from North America and South America.
"Because Chloride is producing in Europe and the currency is
weak, they could say 'let's leverage [Emerson's] distribution'" in
other countries, said Ajay Kejriwal, an analyst for FBR Capital
Markets & Co. "Emerson is a company that has a strong presence
outside of Europe. From a business standpoint, this would be a
strong marriage."
A spokesman for Chloride declined to comment on Emerson beyond
its rejection of the Emerson's initial offer. Emerson isn't talking
either. Chairman and Chief Executive David Farr emphatically
refused to answer questions about Chloride during a conference call
with Wall Street analysts Tuesday.
But Farr has spoken about the growth opportunities he sees in
the company's network-power business, which primarily supplies
computer-server rack components, surge-suppression gear, cooling
equipment and backup power systems for data centers used by
businesses, hospitals, schools and other large institutions.
Network Power generated $5.4 billion of revenue for Emerson last
year, or 21% of the company's $21 billion of total sales in
2009.
Emerson acquired information-technology company Avocent Corp.
last year for $1.2 billion to penetrate further into the data
center equipment market.
"Emerson is looking for a more complete product offering for
customers," said Daniel Holland, an analyst for Morningstar
Inc.
Chloride specializes in uninterruptible power systems that keep
data centers powered up when electricity from utility companies is
disrupted. Uninterruptible power is about a $7-billion-a-year
worldwide industry, with France's Schneider Electric SA holding the
largest share at 26%, followed by Ohio-based Eaton Corp. (ETN) at
12%. Emerson, in third place, has about 9% of market, while
Chloride has 4%.
The uninterruptible-power sector has been steadily consolidating
in the past decade, a trend that's expected to continue. Analysts
say Eaton and Schneider would likely face anti-trust barriers if
either pursued Chloride, leaving Emerson as the most likely suitor
for the company. Chloride runs the risk of becoming a regional
niche player in a consolidating business environment, if it
continues to rebuff Emerson.
"If you don't have scale, you're toast," said Nicholas Heymann,
an analyst for Sterne, Agee & Leach Inc. "There are a lot of
strategic reasons that warrant the guys at Chloride taking a hard
look at Emerson."
Ultimately, the price Emerson is willing to pay for Chloride
will drive decisions by the company's directors and shareholders in
the weeks ahead.
Emerson's offer last month represented a 34% increase over the
price of Chloride's stock before Emerson approached Chloride. But
at 275 pence a share, Emerson's offer wasn't much of an improvement
over its unsuccessful bid in June 2008 of 270 pence a share. The
weakening value of the U.K. pound against the U.S. dollar in recent
months has given Emerson greater capacity to raise its offer.
Moreover, Emerson's decision to take a second run at Chloride
signals to Chloride shareholders that Emerson regards Chloride as
high-value target.
"The dollar has moved in [Emerson's] favor and Chloride is
seeing a decent pickup in orders," said Stephen Swanton, an analyst
for UBS AG, in a recent note to investors. "It may take more than
275 pence to get a deal done."
Chloride's stock ended Thursday's trading session on the London
Exchange down 1.35% at 293 pence a share. In a volatile and broadly
lower session in New York, Emerson was recently trading down 1.2%
at $48.42 a share.
-By Bob Tita, Dow Jones Newswires; 312-750-4129;
robert.tita@dowjones.com
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