Just as soon as Vickers Plc put the finishing touches on its revived industrial empire - acquiring a myriad of marine propulsion equipment suppliers in order to dominate a once fragmented piece of the international maritime market - wheels have been set in motion to acquire the goliath itself.
Last week Rolls-Royce Plc launched a surprise $933 million (576 million pound) agreed cash offer for Vickers Plc in a move aimed at making it the global leader in marine power systems. But the deal, pitched at a 53 percent premium over Vickers share price last Friday, prompted concern from some analysts who felt Rolls-Royce may be paying too much merely to bolster its marine propulsion business.
"This was a big surprise. On the marine side the deal makes sense although that it is only half of Vickers business," said analyst Brian O'Keefe at Commerzbank in London.
Given this focus on marine, Vickers' land-based defense business, which includes battle tanks and armored vehicles, is seen as surplus to requirements and Rolls-Royce Chairman Ralph Robins said that the sale of this division was inevitable.
"Our strategy is to get to number one or two in the various markets in which we operate. We are up there in aerospace -- this will put us there in marine," Robins said.
Vickers marine business is the jewel in a crown that includes turbine components and the land-based defense systems. The merger will boost Rolls-Royce's exposure to marine power systems to around 20 percent of the enlarged group sales or around 850 million pounds in turnover.
Rolls said the marine power systems market was a growth market, with the high-speed sea transport sector growing annually at some eight percent.
Vickers Had Been Reshaping After Cars Sale
Vickers has been in the process of reshaping after selling its Rolls-Royce luxury car arm to Germany's Volkswagen AG last year for 479 million pounds. That was accompanied by a 273 million pound cash return to Vickers shareholders.
The motor arm had been floated off from parent company Rolls-Royce in 1973 and was bought by Vickers in 1980 after running into financial problems. Vickers boosted its marine business through the purchase of Norway's Ulstein in a 304 million pound deal last year.
Shareholders accepting the 250 pence offer will also be entitled to a 2.85 pence interim dividend from Vickers.
Analysts speculated that Rolls-Royce, which admits it approached Vickers first, may have tried separately to pry the marine power systems business from Vickers but was told that the division was only for sale as part of the entire group. TI Group Plc is believed to have received a similar response.
"There was no a la carte it was a set menu," said O'Keefe, who reckons that Rolls-Royce is paying a high price for Vickers on a valuation basis. He estimates a trailing PE (price earnings) multiple for Vickers of 19.8 and a prospective PE for Rolls-Royce of 12.6 compared with a sector average of 14.9.
Rolls-Royce expects the acquisition to be earnings enhancing in the first full year
before goodwill and exceptional items. Robins said the group would continue to target double-digit earnings per share
growth from its basic business.
The deal, which is being financed from banking facilities arranged by Chase Manhattan and Greenwich NatWest, leaves the company with interest cover of around seven times.
Robins conceded that he would be reasonably relaxed with cover of around five times.
Interest cover is a measure of the company's ability to pay interest on borrowings using profits from the year. A higher number indicates less risk.