■ Acquired company generates 85 per cent of sales from oil and gas
■ Initial price of £46m, with up to £32m on top dependent on performance
■ Expected to be immediately earnings-enhancing
High-flying Senior (SNR) created quite a stir by announcing the acquisition of Lymington Precision Engineering. Bought for an initial £45.8m, with a further performance-contingent consideration of up to £31.7m, the newly acquired manufacturer of precision-machined components, assemblies and kit sets counts on oil and gas markets for 85 per cent of its sales.
But news that Senior will now generate 5 per cent of sales from the troubled industry didn't stop its shares from climbing 1 per cent on the day of the announcement. That may be because the deal was cleverly structured: the so-called 'earn-out' clause means that Senior will end up paying 41 per cent less if Lymington struggles with capital spending cuts among the oil majors. In fact, Senior openly admitted the target's financial performance would be "materially lower" over the next 12 months, compared to the £51.2m of sales Lymington expects to report for the year to 31 March 2015.
Nevertheless, management says the new business should be immediately earnings-enhancing, and a useful boost for the group's revenue streams from nuclear, marine and aerospace customers. Its "impressive capabilities and customer focus", says chief executive Mark Rollins, also leave it well placed to benefit from the eventual oil-price recovery.
Numis says…
Buy. This acquisition may look risky given the 85 per cent exposure to oil and gas, but this is reflected in the structure of the deal. Given the fit with Senior's Flexonics division and its ability to look through the short-term problems in oil and gas, this looks a very sensible deal in line with the bolt-on strategy. The business will be run independently - as per Senior strategy - within Flexonics. There is a good fit with UPECA in the Far East, which was bought last year, and GA in North America. Key will be leveraging Senior's contacts to take Lymington into new markets, particularly given the short term outlook for oil and gas. With the arrival of a new chief executive to drive the business through the next growth phase, we remain positive.
Liberum says…
Buy. This is a contrarian acquisition. Senior has managed to buy a UK manufacturer with sales of £51m and an 18 per cent cash-profit margin for an initial consideration of 5 times cash-profits - or 9 times if the 12 month earn-out is achieved. It has managed to negotiate this price because the target's performance is expected to be materially worse over the next 12 months. The deal gives Lymington an enterprise value of about 1.1 times forecast sales and 5.1 times forecast cash profits, rising to 1.5 times and 8.6 times at full consideration. We expect Senior to deliver EPS of 21.1p for the year to March 2015, rising to £21.2p in 2016.
