Unloved U.K. Conglomerate WLTM Some U.S. Investors
(Bloomberg Opinion) -- If you can't sell it, give it away. Having tried and failed to sell its medical business three times in recent years, Britain's Smiths Group Plc is planning to offload the division by splitting it off or taking it public.
That will provide something for exasperated shareholders to cling to – but will only leave Smiths as a slightly less complicated conglomerate in need of further work.
The shares have fallen 23 percent since June, paring the company's market capitalization to 5.5 billion pounds ($7.1 billion). The stock is down 3 percent over the past five years, while the benchmark U.K. index is up 9 percent.
The medical business, which makes syringe pumps, has been a drag. Organic growth has been negative or negligible in the last three fiscal years. And most of Smiths' investors buy into the company for its industrial businesses centered on scanners and detection devices. They aren't so excited by medical technology.
Separation may be a necessary step to a decent bid. Smiths has some good excuses for not tying up a deal sooner. One set of talks previously was with private equity – a buyer not known for paying generously for assets. The others were with U.S. suitors. A transaction involving payment in New York-listed stock might not be welcomed by all of Smiths' current shareholders.
A de-merged medical business could get a boost from having focused and motivated management. But the real upside will come from attracting more investors who actually want to own medical technology – a very U.S.-centric sector. That in turn would make a bid from an American peer more palatable. Notwithstanding the failure of the past discussions, it is possible that a trade buyer could now try and preempt the separation, as analysts at Jefferies point out.
Smiths is positioning its remaining business as an “industrial technology” powerhouse. In reality, it will be a conglomerate with four legs instead of five, albeit all broadly industrial in nature.
Before Wednesday's small jump, the stock traded at rough 15 percent discount to its peers on a forward earnings basis, according to JPMorgan research. Several analysts give the company a break-up value of about 19 pounds a share, more than the current price of just less than 14 pounds.
CEO Andy Reynolds Smith is to be commended for doing something – but he will need to simplify the group further to close that discount.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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