A wave of deals helped lift London markets this morning.
Among the most interesting were acquisitions by financial broker Tullett Prebon (LSE: TLPR) and engineer GKN (LSE: GKN), along with a giant £3.3bn deal for Melrose Industries (LSE: MRO). All three companies also published their interim results today.
Here are the key facts from each firm — plus my view on whether today’s deals are good for shareholders.
Tullett Prebon
Interdealer broker Tullett specialises in arranging deals between buyers and sellers of a wide variety of financial assets.
The firm has responded to a decline in its traditional markets by expanding into the oil sector. Today, Tullett announced the acquisition of MOAB Oil Inc, a US-based energy broker.
Tullett will pay £14.4m for MOAB and believes MOAB’s activities will complement those of PVM, an oil broker Tullett acquired in 2014.
The fall in oil prices has not necessarily been bad for oil brokers, who have been kept busy by buyers capitalising on the opportunity to build stocks of cheap oil. Today’s half-year results show that Tullett’s revenue rose by 15% to £415.7m during the first half, while operating profits rose by 20% to £60.6m.
Earnings of 17.7p per share suggest that Tullett could beat current full-year forecasts of 33.8p. A prospective yield of 4.4% is also attractive — Tullett could be a good income buy.
GKN
Automotive and aerospace engineer GKN is continuing its expansion drive with a €706m deal to buy aerospace firm Fokker. GKN says that the deal will enable the firm to access important new markets in China, Turkey, India and Mexico.
The deal will be funded with a £200m placing and additional debt. My calculations suggest this will raise the firm’s net debt to about £1bn, in addition to GKN’s £1.5bn pension deficit.
Based on Fokker’s 2014 results, this acquisition is expected to add around £38m to GKN’s operating profit, which was £289m in 2014. GKN believes it can cut costs by around £16m by 2018, and expects to improve Fokker’s historic profit margins.
The market liked this deal and GKN shares are up by 7% at the time of writing.
My calculations suggest that today’s gains will leave GKN’s forecast P/E broadly unchanged, at around 10 times post-deal earnings. That looks reasonable, although I would like to see GKN focus on reducing debt before committing to any further deals.
Melrose Industries
Shares in industrial conglomerate Melrose have risen by 10% so far today. The gain is the result of the firm’s decision to sell its Elster water, electricity and gas flow monitoring equipment business to Honeywell.
The £3.3bn sale price exceeds Melrose’s £2.6bn market cap and is nearly double the £1.8bn Melrose paid for Elster in August 2012. As usual, Melrose plans to return the majority of proceeds to shareholders — in this case £2bn, or about 200p per share.
That’s not bad, considering the firm’s shares closed at 255p last night.
Today’s interim results are largely irrelevant, as Elster accounted for around 83% of Melrose’s operating profit last year.
The group’s business model is to buy, improve and sell industrial firms. Shareholders will now have to wait to learn what will replace Elster in the company’s portfolio.
In my view, Tullett, GKN and Melrose all look attractive as income stocks.
