Morningstar | Metso’s Announced Merger With Outotec Brings Scale but Not a Moat
No-moat Metso’s minerals business unit and its peer Outotec announced their intention to merge, and the combined entity would become the second-largest European mining equipment firm by sales volume. Metso shareholders will receive 4.3 shares in the newly created entity for each Metso share. At the same time, Metso’s Flow Control business unit will be demerged and listed as a separate company called Neles. Both transactions are expected to close in second-quarter 2020. For the amalgamated Metso Outotec, management is targeting EUR 100 million in annual cost savings, stemming from overhead and procurement optimization. They also plan EUR 150 million revenue synergies through cross-selling opportunities and see enhanced service networks. While we believe cost synergies will be less complex to achieve, we have doubts over the revenue side. The companies have some overlapping products, but fewer opportunities for synergies and cross-selling on other products may necessitate customer discounts as incentives. Notwithstanding, if full synergies were implemented on the cost and revenue side, which is not our base case, there would be room for moderate upside on Metso’s share price.We do not foresee any changes to our no-moat rating for Metso Outotec. Outotec has a more volatile earnings profile (because of project work exposure) than Metso. Additionally, the new entity will not contain Metso’s more the stable and higher-margin Neles. Thus, we see the acquisition as marginally accretive.
On the other hand, we think the Neles demerger is positive as the company focuses its operations in a few market niches where the industry is fragmented. We also believe Neles could command a higher valuation multiple once demerged because it is more resilient and has a higher margin.
Metso is a global services, products and systems provider. Co. serves its customers in mining, oil and gas as well as aggregates industries. Co. serves also some other process industries, such as pulp and paper industry. Co.'s offerings to the mining industry include grinding mills, mill linings and grinding media; as well as crushers and screens. Co.'s offerings to the aggregates industry include crushers; as well as screens, feeders and conveyors. Co.'s offerings to the oil and gas industry include control valves, on-off valves; intelligent safety valves; intelligent valve controllers and limit switches; intelligent field services; spare and wear parts; as well as performance services.
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