Takeaway: The MTW crane business has positive value, we think, and the Zoomlion bid for TEX – a new high comp – should highlight that potential. Other Chinese companies may look to diversify away from domestic markets suffering from sagging fixed asset investment and fear of currency devaluation. While we like the idiosyncratic value-unlock character of an MTW long position, the macro and credit environment are increasing inhospitable. That argues for a shorter leash. We are curious to see how the shares trade around the actual spin, as trading in break-ups typically improves just before or somewhat after actual separation. We would also keep an eye on the (now less levered) MTW crane business, which may get severely oversold as portfolios dump this “too small” potential acquisition target. Ping us for our MTW Black Book and EQM/data sets for additional background.
Zoomlion Bid: We don’t doubt that Zoomlion is serious in its bid for TEX. Zoomlion’s home market is fragmented, ultra-competitive, and in a likely structural decline. There is also widespread concern about a substantial currency devaluation. If Zoomlion waits too long, diversification away from domestic markets may become too expensive. Others Chinese manufacturers may try to follow Zoomlion’s lead, and companies like Sany may do more deals along the lines of its early 2012 purchase of Putzmeister. If that’s an accurate take, Goldman’s Asia bankers will have an even happier 2016 than Australian mining insolvency lawyers.
Zoomlion As Comp: The value of a business is the present value of future free cash flows, liquidation value, or what someone will pay for it. The $30 cash offer for Terex, a ~100% premium to mid-January trading, could be construed as a necessary move by a company in a tough domestic market. It could also be viewed as reshaping the competitive landscape in the industry. Zoomlion will gain Terex’s distribution, residual value history, installed base, and brand. That may make a similar transaction attractive to a Sumitomo or Sany. If TEX rebuffs the Zoomlion offer, it could shift the focus to Manitowoc’s crane segment. We don’t know exactly which TEX businesses Zoomlion is most interested in, but it’s a fair bet that cranes are a key attraction.
MTW Cranes Valued @ TEX Bid: It is our contention that the MTW crane segment is given a negative valuation by the market, to the extent that one can guess how the market apportions value. On a sales basis and depending on how the final debt allocations get settled, we would estimate that it would equate to $8-$9 per current MTW share. Assuming the market even roughly prices in this new comp, MTW shares should respond well. We do think that the crane business at MTW is a good sale candidate that fits with several deep pocketed buyers.
S&P Doesn’t Like It, So It’s Probably Good: The analysts at S&P took a break from their after-the-action downgrading energy-related debt to give an opinion on the new issues from Manitowoc and MFS. Our read is that the ratings are not entirely positive, although the pricing on the larger MFS $975 mil 7 yr debt at a Libor +475 would appear an improvement vs. the current costs. It seems that MFS will have somewhat more debt than initially anticipated, consistent with elevated concern about crane cyclicality. We will get more details on the debt allocations on Thursday and readers can peruse the S&P ‘analysis’, but the recent weakness in high yield markets is going to take some value away from equity holders. Most people we have spoken with will just be happy that they are getting the issues off at a reasonable price to complete the separation on time.
Upshot: The MTW crane business has positive value, we think, and the Zoomlion bid for TEX – a new high comp – should highlight that potential. While we like the idiosyncratic value-unlock character of an MTW long position, the macro and credit environment are increasing unhospitable. That argues for a shorter leash. We are curious to see how the shares trade around the actual spin, as trading typically improves just before or somewhat after actual separation. We would also keep an eye on the (now less levered) MTW crane business, which may get severely oversold as portfolios dump this “too small” potential acquisition target.