HELSINKI/LONDON (Reuters) - Scottish engineering company Weir Group (WEIR.L) has approached Finnish rival Metso MEO1V.HE over a possible $5 billion (3 billion pounds) combination as it tries to expand its core mining division to match its rapid growth in oil and gas.
Weir has proposed an all-share deal in which Metso shareholders would receive 40 percent of the new entity and is offering a 5-10 percent premium over Metso’s recent share price, a source familiar with the matter told Reuters.
Weir said it had made an “indicative all-share merger proposal” to Metso’s board after Metso confirmed a report in the Times newspaper that Weir was interested in a merger. Metso said no talks had yet taken place and it was considering the proposal.
A deal could be worth as much as 3.9 billion euros ($5.4 billion) based on Metso’s closing share price on Monday and a 10 percent bid premium.
While Weir shareholders would end up with most of the combined entity, the source said the new company’s board would be staffed with both Metso and Weir executives.
“What matters to the Finnish side is not an acquisition - it is to get a stronger Finnish company. The proposed structure through an all-share merger will allow existing shareholders to benefit from the huge synergies,” the source said.
Metso shares soared 21 percent to 28.74 euros by 1023 GMT. Weir was down 2.4 percent. The announcement helped to pull up other companies in the sector, with Danish engineer FLSmidth (FLS.CO) up 4.3 percent on hopes of further industry consolidation.
Metso spun off its paper machine business Valmet (VALMT.HE) at the start of the year, basically halving the size of the company and making it a more attractive acquisition target, analysts said.
Weir Group has seen profits triple since 2009 as the firm expanded into the U.S. and capitalised on the growth of shale oil and gas. The company now supplies around 40 percent of the pressure pumps used in the U.S. shale oil and gas sector.
But historically Weir’s focus has been on the mining sector, which still accounts for over half of its revenue, and analysts said a move for Metso could mark a strategic turn back to its core market.
“From a strategic sense it looks reasonably sensible. The core business has always been on the minerals side... It feels potentially like there’s a bit of a refocusing from management towards mining,” a London analyst said.
Juha Kinnunen of Inderes Equity Research said the Finnish state, which owns 11 percent of Metso shares, could block any deal.
The state’s holding in Metso dates back to 1946, when state-owned metal workshops were merged as Valmet Oy. Following several mergers and acquisitions, these became Metso in 1999.
The timing may suit Finland’s government, which said last week it could sell stakes in some companies before 2015 to boost its budget by 1.9 billion euros. The state holds stakes in 15 of Helsinki’s listed firms and controls 44 others.
“I think the deal would have to be some kind of a merger, not a straightforward acquisition by the Weir Group,” said Kinnunen. “Metso should be given some independence, and maybe the Finnish state would hang on to a stake in the new company.”
Kinnunen noted that buying Metso would be a big step for Weir, which has a market value of 5.4 billion pounds ($9.0 billion), compared with Metso’s 3.6 billion euros.
“The two could have quite good synergies. They could expand their offering to the same customers.”
Weir Group has hired Bank of America Merrill Lynch (BAC.N) and UBS UBSN.VX to advise it on the potential deal, while Metso is working with Morgan Stanley (MS.N), said a source who asked not to be named because the talks are private.
Metso’s shareholders also include the Swedish activist fund Cevian Capital, whose co-founder Christer Gardell sits on Metso’s board. Gardell was among the first investors to promote this year’s split-up of Metso as early as 2005.
Additional reporting by Anjuli Davies; writing by Stephen Eisenhammer in London and Jussi Rosendahl in Helsinki; editing by Tom Pfeiffer