Acquisitions in the corporate world are made to facilitate growth or gain technological prowess or access newer markets. The £9.5 million (Rs65 crore) acquisition of UK-based DavyMarkham Ltd will give Hindustan Dorr-Oliver Ltd (HDO) the expertise to enter the heavy engineering business.
DavyMarkham is a 180-year-old firm with revenue of around £20 million. It designs and manufactures large equipment for mining, power, oil and gas and nuclear segments—areas with high business prospects in India. After being on the verge of closure about four years ago, Endless Llp, the private equity investor, turned it around.
HDO, a 55% unit of the Hyderabad-based IVRCL Group, is known for its solid-liquid separation technology used in a host of industries such as environmental engineering, fertilizer and pulp and paper and applications such as mineral beneficiation—the process of adding value to an ore to enhance its content. It will now market these solutions overseas using Davy’s presence in Europe and Canada.
The acquisition comprises of £8.5 million paid towards acquiring the equity, while another £1 million will be payable towards reducing debt in Davy. An interesting element of the acquisition was that HDO purchased Davy sans the land and housed it on land leased for 25 years in the UK, which “protected HDO from sinking money into land which would not only make the deal more expensive, but reduce the return on equity”, says a person familiar with the matter.
HDO, which carries hardly any debt on its books, funded the entire acquisition through internal accruals. The acquisition has been done at around 6.2 times Davy’s operating profit of £1.3 million registered during fiscal 2009. The only concern, common to companies in the developed world, is the relatively high staff cost (around 30-40% of sales for Davy), compared with India (at HDO, it is around 5-6% of sales). The immediate challenge for HDO is to double Davy’s revenues in fiscal 2011, in order to offset costs, which in turn will improve profit margins.
Davy’s full-year revenue will reflect in HDO’s accounts from FY2011. For 2009-10, about £3 million only will be reflected in the books, as the acquisition was completed in the fourth quarter of the fiscal.
There’s little doubt the acquisition is positive in the long term. It is also cheap and the markets cheered it, sending the stock up 6.3% on Tuesday. The stock has made steady gains in recent months, but at around 12 times expected FY 2010 earnings, it isn’t expensive.
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