Smiths Industries Buys Graseby

Smiths Industries, the diversified engineering group, returned to the acquisition trail, paying 136m for Graseby, the medical and instrument testing equipment company. The price of 211p a share for the recommended offer was at a 41 per cent premium to Grasebys closing price on Monday and sent the shares forward 58p to 207 1 /2p.

Smiths shares closed up 9p at 804 1 /2p. The deal was Smiths third this year and takes its spending on acquisitions to 430m since 1991. Four months ago, it paid 33m for two small engineering groups. As with those earlier deals, Graseby is being bought for cash, a move which will increase net debt to 200m and gearing from 15 to 75 per cent.

 

Keith Butler-Wheelhouse, chief executive, said the board was comfortable with this level, pointing out that Smiths generated more than 70m of free cash a year and that the intention was to pay down the debt as soon as possible. In addition, interest cover remained above 14 times.

Graseby, which lost its chief executive, Paul Lester, in May also announced its results for the six months to June 30. These showed an 11 per cent increase in profits before tax and exceptionals to 5.2m, on sales up 7 per cent to 52.6m.

Adjusted earnings per share advanced 9 per cent to 5.8p, although with a write-off for goodwill, losses per share amounted to 9.9p. No interim dividend is declared.

Smiths main overlap with Graseby is in medical testing equipment. Smiths medical business, its third largest division, generated revenues of 303m last year, against 36m at Graseby. Butler- Wheelhouse said the challenge was to improve its 16 per cent operating margin towards the 24 per cent enjoyed by Smiths division.

Advantages are also seen from the inclusion of Grasebys other two businesses, a chemical agent monitoring business used in the defence industry, and product monitoring equipment used in the food and drugs industry. However, Butler-Wheelhouse refused to rule out disposals.

Smiths has been advised by Flemings and Graseby by Cazenove. * COMMENT This looks a comfortable bolt-on deal for Smiths. The price, at 1.3 times 1996 sales, is on apar with similar agreements struck recently in the instruments and controls sector. The 40 per cent premium to Grasebys share price also looks undemanding - although some eyebrows might be raised because of the companys warning over the strength of sterling. It will also bring some relief to Graseby shareholders, who have seen the shares move sidewards for the past five years. With Smiths underlining its intentions to pay off its debts quickly, speculation has increased that it is preparing for a big deal. Analysts are holding current year pre-tax profit forecasts at