AnalysisSmiths Group plays its cards tight
Smiths Groups sells its aerospace division to GE for $4.8 billion, proposing investors a £2.1 billion return — and then forms a detection JV with that company, with both companies hopingt o benefit from increased spending on WMD dection
The company motto of London-based Smiths Group is “Bringing Technology to Life.” How about changing it to “Making A Good Life off Technology”? Here are two intertwining stories:
* A couple of days ago Smiths sold the Smiths Aerospace Division to General Electric for $4.8 billion, with a proposed return of £2.1 billion to shareholders.
* At the same time, Smiths and GE have signed a letter of intent to form Smiths GE Detection. Smiths will own 64 percent and GE will own 36 percent of the JV. The JV will combine Smiths Detection with GE Homeland Protection to create a global business serving the growing detection and homeland protection markets.
Regarding the sale of the aerospace division, a FT analyst noted that “Disposing of a business no one knew was for sale, for a much higher price than seemed possible, is something of a coup.” The deal was the right one for Smiths for two reasons. Financially, the smaller business will be more highly leveraged, with a lower rating and lower dividend cover. Return on capital will likely increase from 13.6 percent to 14.7 percent (pro forma 2006) and the conversion of profits to cash will rise to 90 per cent, up 9 percentage points. Strategically, Smiths did not have much of a choice as it simply did not have the scale effectively to compete in the demanding aerospace market, in which more and more risk was being shouldered by suppliers.
The detection JV holds its own promise for the company, and GE’s willingness to keep a 36 percent minority stake while allowing Smiths to run it should tell us something about the confidence GE has in Smiths’s technological savvy — and in the likely rate of growth of the detection segment within the larger homeland security sector.
The FT analysts always introduce a note of caustion, and one is in place here: The 11 percent surge in Smiths’s share price two days ago reflected the previous undervaluation of the aerospace business, as also a gruding re-think on the quality of the company’s management. We should note, though, that Smith’s share price performance since 2001 is but marginally better than that of the FTSE 100. Yes, the analyst concludes, Smiths’s “management has raised its game, but still has plenty to prove.”
-read more about the sale of Smiths’s aerospace division here | and about the detection JV here; and see the FT analysis (sub. req.)
