It is Unlikely that Zoomlion Would Be Able to Buy Terex
It is Unlikely that Zoomlion Would Be Able to Buy Terex
TEX Received a Bid from Chinese Zoomlion to buy the company at $3.3 billion
The offer from Zoomlion represents a 100% premium and the TEX stock price has increased around 70% since the offer was made public
In 2014, Zoomlion’s profits declined by 80% and this bid is a desperate measure to diversify their operation and gain international exposure
Zoomlion’s revenue is much lower than TEX and they would need a large financial backing to pull this deal off
We believe Zoomlion will not be able to conclude the transaction and secondary investors should reduce their exposure of TEX at current market price to get out while they are ahead
If you have ever been to a construction site, there is good chance that you have seen the equipment made by Terex Corporation (NYSE:TEX). They mostly provide heavy duty industrial equipment for lifting and handling materials. Terex Corporation’s operation spans over several sectors, including aerial work platforms, construction, cranes, material handling & port solutions, and materials processing.
Besides offering material handling solutions to various industries, they also understand that companies using their products would need to commit large amounts of capital to purchase those products. Hence, Terex Corporation also offers a range of financial products and services in order to help their customers smooth the transaction process without involving third parties. A separate entity called Terex Financial Services handles the financing part of the process.
While the bulk of Terex Corporation’s equipment is manufactured in a handful of key locations in North America, Europe, and Australia; they market their products all over the world.
Zoomlion Joins the Bidding War
Last week, Zoomlion, the Chinese equipment maker – according to some the “Chinese Caterpillar” – made a $3.3 billion offer to buy Terex Corporation. At the time of placing the bid by Zoomlion, Terex Corporation’s stock price was trading around $13.30 per share, with a market cap of under $2 billion. Zoomlion offered $30 per share to buy the company, effectively offering a 100% premium – all cash!
The interesting thing is that before Zoomlion joined the bidding war, Terex Corporation already agreed to merge with its Finnish competitor Konecranes Oyj. However, according to Bloomberg, “Terex has entered into a confidentiality agreement with Zoomlion and is in discussions regarding the proposal, according to the statement.”
This complicated the on-going merger process with Konecranes Oyj, but investors were thrilled as the Finnish company made a statement saying that merging with Terex Corporation offers a “highly compelling opportunity for both companies and their shareholders.”
It means that investors should be optimistic about a possible bidding war as the Terex Corporation board would likely expect a higher than $3.3 billion bid from Konecranes Oyj in order conclude the merger.
It is important to note that the agreement between Terex Corporation and Konecranes Oyj was based on “all stock,” where the offer from Zoomlion is all cash, which makes the bid from Zoomlion a much better deal.
Why The Chinese are Interested in Terex
If we want to understand the rationale behind the bid from Zoomlion, then we have to first take a look at why Terex Corporation and Konecranes Oyj agreed to the merger in the first place.
One of the reasons these two competitors wanted to merge is the emergence of companies like Zoomlion, who sell their products at a lower margin and increasing competition in the market.
The Chinese economy has been slowing down for last few years, GDP growth is down, and the central bank of China had to reduce key interest rates several times in order to boost the economy. However, economists are pretty certain that the “production based” growth model of China has reached its peak and the growth momentum would normalize over the next decade. It means that large scale construction work would slow down in China, which would likely hurt the top line of companies like Zoomlion.
Companies like Zoomlion are increasingly focusing on international market, where Terex Corporation and Konecranes Oyj have a large market share. Although Terex Corporation and Konecranes Oyj have a combined revenue of around $10 billion, increased competition from Chinese companies have made their margins pretty thin over the last few years.
The merger between Terex Corporation and Konecranes Oyj would have provided only $121 million in annual savings if they combine their operations from increased economies of scale.
If the merger between Terex Corporation and Konecranes Oyj goes through, it would make it even harder for Zoomlion to expand its market abroad, and that’s part of the reason they are offering a 100% premium to buy Terex Corporation.
So, investors need to understand that Zoomlion needs the operation of Terex Corporation more than the Finnish competitor, otherwise they would not have offered such a high premium and agree to pay it all in cash.
There is a Slim Chance that Zoomlion Would Be Able to Pull It Off
In 2014, Zoomlion’s revenue was at $3.93 billion and Terex Corporation’s annual revenue was at $7 billion. In this desperate bid, Zoomlion is trying to buy a larger company in order to secure its future amid declining domestic market conditions.
Although Zoomlion have discussed the offer with their bankers to secure financing and informed the Chinese government about their offer for clearing regulatory requirements, analysts are not sure if they have the resources to conclude the deal.
Stig Gustavson, the Chairman of Konecranes Oyj also expressed his concern that Zoomlion might not have the ability to pursue such a deal. He also reassured the media by saying that “we have a deal with Terex, and that can’t be terminated just like that.”
Although the stock price of Terex Corporation surged from $13.30 to $22.86 per share amid the offer form Zoomlion, representing an increase of 71.88%, it is still trading a much lower price compared to the $30 per share offer.
Part of the reason is that the market does not think Zoomlion actually has the resources to actually buy Terex Corporation. Even if they do, the financial burden would be so high that it would dampen the value of Zoomlion and that’s why Zoomlion’s stock price has gone down around 7% after they placed the bid.
In 2014, Zoomlion’s profits fell by around 80% compared to the previous year and the management is acting desperately. We believe the bullish momentum of Terex Corporation is based on an exaggerate promise from a Zoomlion and there is a very slim chance that they will be able to conclude the deal even if Terex Corporation agrees to accept their offer.
Secondary investors should evaluate their positions in Terex Corporation and try to reduce their exposure at the current market price, because the stock price of Terex Corporation would likely decline in a few weeks once the market realizes that this offer from Zoomlion would not materialize.