Surging Fenner on French takeover menu

As a robust, well-run British company with world-leading technology, it perhaps should come as no surprise to find that Fenner (FENR) is the latest target for overseas M&A raiders.

Potential suitor Michelin, the French tyre maker, wants to boost its position in the mining industry and sees Fenner’s leadership in heavy conveyor belts as the perfect way to achieve that. Michelin also sees benefits from adding Fenner’s reinforced polymer technology across a range of end markets.

Last night’s surprise 610p a share, £1.2 billion offer has been backed by Fenner directors and should be well received by shareholders, given that shares were 466p at the end of last week and as low as 106p just over two years ago.

According to UBS, the proposal represents a multiple of 13 times Fenner’s forecast underlying earnings for the year to August, falling to 12 times on 2019 estimates. UBS analyst Mark Fielding notes that this is in line with the kinds of multiples paid for other UK engineering companies in recent years.

He added: “In the context of Fenner having traded at an average 20%-25% sector discount over the last decade this could seem a generous multiple.”

However, Fielding goes on to question whether the price fully takes into account Fenner’s growth prospects, given that forecast earnings for 2018 are still only 70% of the company’s peak profits in 2012.

There is also the question of a potential counterbid, which the market certainly thinks is a possibility as shares are above Michelin’s offer price.

Source: interactive investor         Past performance is not a guide to future performance

Fielding said: “While there are companies that could have a strategic fit with Fenner’s divisions individually it is not obvious to us that there is a third party that would have the same strategic logic to bid for the whole group.”

But with European M&A activity on a roll, it would be foolish for investors to discount the possibility of further interest. In fact, deals are now flowing at a rapid rate as good quality UK companies such as Fenner remain attractive to foreign buyers.

In recent days alone, we’ve seen a £4.9 billion approach to shopping malls owner Hammerson (HMSO) from France’s Klepierre and the start of talks over a takeover of UK electronic trading firm NEX (NXG) by US-based exchange operator CME (CME).

And, of course, the headline-grabbing and very bitter £8 billion takeover wrangle involving GKN (GKN)  and Melrose Industries (MRO) continues to rumble on. According to Reuters, European M&A activity is up by 47% to $258 billion from the start of 2018 to the end of last week.

The improving global economy, with the OECD forecasting growth of 3.9% for this year and next, is helping. But it’s also obvious that Brexit uncertainty has not put off dealmakers, particularly those from Europe, as predators take advantage of a stronger euro and the cloudy outlook for UK companies and shareholders.

For Fenner, which was founded in Hull in 1861 and has been listed on the stock market since 1937, the Michelin deal has been a long time coming.

Mark Abrahams, who joined Fenner in 1990 and is in his second spell as chief executive, said: “We find the cultural fit and business opportunities excellent with Michelin. Both companies have innovation in their DNA and are customer solution oriented.”

East Yorkshire-based Fenner has been through some tough times in recent years, not least after the slump in commodity prices around 2014. In addition, the growth of shale gas in the US meant the country’s coal industry – a major buyer of Fenner’s conveyor belts – took a real hammering.

Fenner’s profits fell significantly, leading it to slash its dividend, although its most recent results for the year to August showed a doubling in earnings per share to 17.7p and a 40% hike in its full-year dividend to 4.2p.

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