Schneider Electric offers $5 billion for Invensys takeover

Schneider Electric SA, the world's largest maker of low- and medium-voltage equipment, is in talks about a £3.3-billion ($5-billion) offer for the UK's Invensys Plc to add industrial software and control systems.

France's Schneider is offering to pay 505 pence a share, comprising 319 pence in cash and 186 pence in new shares, London-based Invensys said on Thursday. Invensys indicated it's likely to accept an offer at the proposed value, which is 15 per cent higher than the closing share price yesterday. Schneider said that the talks are at an early stage.

Invensys shares rose as high as 513.50 pence on Friday, indicating that some investors expect a counterbid. Emerson Electric Co, a US maker of technology for refrigerators and air conditioners, approached the company last year about a possible deal. Other potential suitors may include General Electric Co and ABB Ltd, according to Royal Bank of Canada.

"Emerson is perhaps better placed than Schneider to offer a higher bid given the greater synergy potential, which we estimate at five per cent of sales versus four per cent at Schneider," said Societe Generale analyst Alasdair Leslie. "Invensys remains a highly prized asset for Emerson," given the size of its process automation offerings and a "highly complementary" product portfolio, he said.

Remote monitoring
A takeover of Invensys would bring the buyer meters, controls and safety systems that help to manage heating, temperature and remote monitoring applications. The products of the British company, which operates in more than 180 countries and employs more than 16,500 people, are used by a wide range of clients, from oil refineries and power stations to mining companies and appliance manufacturers.

David Farr, chief executive officer of St Louis-based Emerson, said in September that the company had considered a deal with Invensys on and off for 15 years and would continue to look at the company's process-automation business.

At the time of the talks between Invensys and Emerson last year, the British company was grappling with pension liabilities, which amounted to £490 million at the end of September. Invensys then sold its railroad unit in May to Germany's Siemens AG for £1.74 billion and also reduced pension liabilities, making it more attractive as a takeover target.

Potential opposition
Some Emerson investors would probably oppose a counterbid for Invensys, said Christian Mayes, an analyst with Edward Jones & Co in Des Pere, Missouri. "Emerson investors still have a bad taste in their mouth from when Emerson got into that bidding war for Chloride just a few years ago," he said. "Hopefully, management is looking to use their capital a bit more wisely and not get sucked into a bidding war."

In 2010, Emerson beat Zurich-based ABB in a competition to acquire London-based Chloride Group Plc, Britain's largest maker of gear to protect against power failures, pushing up the final price. Emerson purchased Chloride right before Europe went into recession, making it difficult for Emerson to make the acquisition work, Mayes said. Representatives for Emerson, ABB and GE declined to comment.

Lower multiple
Before Friday, Invensys shares had gained 60 per cent since November 27, the day before it announced the Siemens deal. Still, the company had been trading at a multiple of 1.5 times its projected 2013 revenue, lower than 65 per cent of measurement instruments companies valued at more than $500 million, according to data compiled by Bloomberg.

"The strategic and financial rationale for this transaction, if consummated, is compelling," said Rueil-Malmaison-based Schneider. A deal would help to cut costs between the two companies and give Schneider access to "key electro-intensive segments" as well as energy management offerings and "the fast-growing software business for industrial operational efficiency".

Invensys shares rose as much as 17 per cent in London on Friday and were up 15 per cent as of 9:50 am, valuing the company at £3.3 billion. Schneider dropped as much as 4.9 per cent in Paris, giving it a market value of 31 billion euros.

Invensys said it disclosed the offer without Schneider's consent, adding that there's no guarantee a firm offer will materialise. Under UK takeover rules, Schneider has until August 8 to make a firm offer or to walk away. JPMorgan Chase & Co and Barclays Plc are advising Invensys.

Ratings risk
Schneider has an A3 rating from Moody's Investors Service, and an A- from Standard & Poor's, both with a stable outlook, and an takeover of Invensys would put pressure on the company's debt profile, said Nicolas Hue de la Colombe, a credit analyst at Credit Agricole in Paris.

"With about Euro 2.3 billion of the transaction in cash, the A- and A3 ratings of Schneider are potentially at risk," he said. "We had earmarked a leeway of about 1 billion euros in acquisitions for Schneider to be able to keep its A- rating."

Since Jean-Pascal Tricoire was named as Schneider CEO in May 2006, he has bought dozens of companies, spending more than Euro 11.6 billion and doubling Schneider's revenue to Euro 24 billion. Although the company's power solutions push eroded margins - because such sales outgrew more profitable products like switchgears - the CEO is eyeing purchases that will make the company's foray into services more lucrative.

'Pockets of software'
Tricoire said in February the company may buy "pockets of software and know-how" if needed, and still favours "bolt-on" deals.

Schneider spent just Euro 242 million on acquisitions in 2012 compared with Euro 2.87 billion in 2011, when it bought companies such as Spanish software company Telvent GIT SA, Chinese energy-savings drives maker Leader Harvest Power Technologies, and Indian maker of inverters and power-storage systems Luminous Power Technologies to expand in emerging markets and broaden power-management systems.

"It's going to be interesting to see if others come in here, whether it's peers like Emerson or someone else," Sachin Shah, a special situations merger arbitrage strategist at Albert Fried & Co in New York, said by telephone. "It's possible."