12 Aug 21. Coming on top of last weeks recommended bid for Meggitt by Parker Hannifin, if there is one immediate take for me to make in relation to the indicative 900p per share possible counterbid offer from Cleveland, Ohio based TransDigm it is one that highlights just how undervalued Meggitt shares have been over the past few years.
With the Meggitt share price sitting this morning at around 830p, it is easy to forget that back in July the price has actually fallen below 400p. Meggitt’s share valuation along with that of many other specialist UK based engineering and manufacturing companies highlights to me abject failure of the fund management and institutional investment broking community to properly value manufacturing entities.
This is nothing new of course and the routes of failure by institutional investors to appreciate the value of specialist engineers goes all the way back to ‘Big Bang ‘ in 1986 and which had brought to an end the long history of separation of dealers, jobbers, brokers and advisors, allowed mergers and take-overs of broking partnership operations by big banks including those that were foreign owned and when long held traditions and culture of what until then we referred to as merchant banking was thrown out of the window in favour of open competition.
From that point on, attitudes of the investment banking community were increasingly based on speed of potential return and the possibilities for M&A – it was in the eyes of some greed by another name. For many engineering and manufacturing companies, weakened as they had been often by poor management and failure to invest, the writing was on the wall.
To that end, long term investment became an almost dirty word and from that point on investors would often close their eyes to investment in engineering and manufacturing companies if they could. The bottom line – too often the capital markets system failed UK engineering and manufacturing sectors and that is one big reason why we find ourselves in the situation today of manufacturing far too little of what we consume today. The other is that we failed to invest and ensure that we were competitive with the rest of the world.
Companies need finance to order to invest for long term development and growth and that is what London’s capital markets are supposed to be there to provide. Sadly, for many, that also meant being forced to then look over their shoulder at shareholders who were deep down unwilling to support concepts of long-term investment that could not by its nature provide a quick return.
My own view is increasingly not about who owns a company these days but moreover, about what new owners are prepared to invest to grow the business. Meggitt is certainly a great company and one that has many long-term strengths. It deserves far better in my view than being ultimately taken over by a company such as TransDigm that is happy to boast that it has a private equity-like structure and culture.
Parker-Hannifin meanwhile has a culture and forward-looking investment approach very similar to that of Meggitt. Parker Hannifin and Meggitt share a great many strengths and Meggitt will, in my view, be far better enhanced by partnering the future course of direction with Parker Hannifin.
Meanwhile for the record, the preliminary/indicative offer for Meggitt from TransDigm Group Inc, a company that has grown through acquisition of competitors and which manufactures aircraft components including ignition systems, pumps, actuators and controls, values Meggitt at around £7bn – approximately 13% higher than the £6.3bn recommended offer from Parker-Hannifin Corp. For now, we can do little more than await events and I will comment further when and if appropriate.
In a statement yesterday afternoon, the Board of Meggitt said:
“It was currently reviewing the Proposal as well as TransDigm’s associated information request and will continue to consider carefully not only the financial terms of any offer but also TransDigm’s plans for the Company and the potential impact across all its stakeholders including, but not limited to, Meggitt’s employees, pension schemes and customers together with HM Government and other regulatory bodies”.
The statement went on to confirm that “the Board of Meggitt will assess any competing proposal by reference to whether it includes commitments at least equivalent to those made by Parker in the announcement, including: (i) an undertaking to offer HM Government at least equivalent commitments to those agreed to be offered by Parker; (ii) at least an equivalent level of certainty regarding satisfaction of regulatory approvals as provided by Parker; (iii) agreement with respect to the funding of Meggitt’s pension schemes on terms acceptable to the Meggitt Board; and (iv) commitments in respect of employment and related protections at least equivalent to those made by Parker”.
“The directors of Meggitt continue to recommend unanimously the offer by Parker to Meggitt shareholders announced on 2 August 2021 and intend to include that recommendation in the Scheme Document expected to be sent to Meggitt shareholders in the week commencing 16 August 2021. The Board of Meggitt believes Parker’s offer continues to represent an attractive proposition for Meggitt’s shareholders and for its broader stakeholders, including its employees, pension schemes and customers, together with HM Government, for the long-term”.
At this stage there can be no certainty that any firm offer will be made by TransDigm nor indeed, as to the terms on which any offer might be made. The more that I look at it the more I believe Meggitt is absolutely right to stand firmly behind the recommended offer from Parker-Hannifin – a company which I might add already has significant interests in the UK.
Importantly, Parker Hannifin has within its offer made an unprecedented level of legally binding commitments and in doing so they have confirmed that they will be a responsible steward of Meggitt. In doing so, Parker-Hannifin is showing itself for what it is – a company that seeks to not only double the size of its UK interests and benefit also from Meggitt’s US interests, but importantly it is a strategic buyer as opposed to being a private equity organisation that may have ambitions to ultimately break Meggitt up for the sole purpose of achieving profit.
CHW (London – 12th August 2021)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785