DealTalk: Medical bid may herald long-awaited Smiths break-up

BANGALORE/LONDON Tue Jan 18, 2011 1:24pm GMT

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BANGALORE/LONDON (Reuters) - A spurned bid for Smiths Group Plc's (SMIN.L) medical business takes the British engineering conglomerate closer to a possible break-up, a move many investors have been waiting for.

The company rejected a 2.45 billion pound ($3.9 billion) approach for its medical equipment unit late last week, which a person familiar with the matter said came from buyout firm Apax APAX.UL.

Smiths Group shares leapt on Monday and by 1136 GMT on Tuesday stood at 1,388 pence a share -- 8 percent up from their closing price on Friday, before the approach was disclosed.

"The fact that the ball has started to roll on this as a break-up candidate is more important for investors, rather than the actual numbers," a top-10 institutional shareholder said.

Analysts say the medical unit could fetch a higher price, but the rise in Smiths shares was also a sign that investors hope other parts of the company will also go up for sale.

Based on similar recent deals, a full break-up could value the firm at as much as 1,970 pence a share, or 7.71 billion pounds, UBS analyst Avi Hoddes estimates, with the medical unit worth more than 3 billion.

Edison Investment values Smiths at more than 1,600 pence a share.

Smiths Group has four major divisions -- Smiths Medical, the biggest, with over 30 percent of its sales; John Crane, which makes mechanical seals for the oil and gas industry; Smiths Detection, a maker of airport X-ray scanners and explosives scanners; and Interconnect, which makes military transceivers and other electronic components.

"Monday's (share price) move cannot just be explained as the possibility of a bid for Medical at 3 billion pounds," RBS analyst Sandy Morris told Reuters. "We've gone further than that already.

"The share price reaction is saying it does not stop with Medical. We might see bids for John Crane or Interconnect."

Edison analysts agreed, saying the company's structure was "questionable" and mergers and acquisitions (M&A) were picking up within the sectors where its divisions operate.

"The timing for a break-up is now right, with Medical turned around, Detection in a strong position and the industrial markets demonstrating recovery," they wrote.

Co-operative Asset Management, among Smiths's 20 largest shareholders, backed the board's refusal of the bid.

"We trust the judgment of the management, led by CEO Philip Bowman, that turning down a bid at that level is in the best interests of shareholders," spokesman Andy Hammerton said in an emailed statement to Reuters.

The reported bidder, private equity firm Apax, declined to comment. Apax once owned Sweden's Molnlycke Healthcare, one of its most successful deals, but currently does not have any medical-device investments.

A BREAK-UP STORY

Smiths' CEO Bowman oversaw the break-up of Allied Domecq and the sale of Scottish Power to Iberdrola (IBE.MC), lending support to the notion that Smiths's days as a diverse conglomerate could be numbered.

"This has been a break-up story for a while and Philip Bowman is the man to do it," the top 10 shareholder said.

Conglomerates often do split up into smaller entities.

Last week U.S. manufacturing conglomerate ITT Corp (ITT.N) unveiled plans to split into three. Others that have moved to split up their operations include Fortune Brands FO.N and Motorola (MSI.N).

Hoddes at UBS said Bowman's track record, a new IT structure to minimize impact on other divisions if a spin-off occurs and a more efficient tax structure to deal with possible disposal proceeds supported the view that the company would eventually be broken up.

"Smiths has always said portfolio change would happen one day," RBS analyst Morris said. "Once you are perceived to be willing to sell 31 percent of your sales, it is difficult to say, 'That's it, that's all we are going to do'."

(Additional reporting by Quentin Webb, Simon Meads and Tommy Wilkes. Editing by Jane Merriman)

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