Engineering conglomerate Smiths (SMIN) is snapping up a US security systems maker in an attempt to further mitigate the sales decline caused by the tough oil and gas markets.

The £4.3 billion cap is acquiring Morpho Detection, a California-based company that detects explosives in checked baggage, for £492 million.

It will be merged into Smiths’ own Detection arm, which makes products that detect explosive, chemical and radioactive threats.

The deal is expected to deliver $30 million of annual cost synergies by the third year following completion, news which sends the shares up 4.4% to £11.57.

SMITHS GROUP - Comparison Line Chart (Rebased to first)

It looks like a sensible move for Smiths, whose John Crane division has suffered in an era of plummeting oil prices, leading to a group revenue fall of 3% to £1.37 billion in the six months to 31 January.

Smiths’ Detection business has been growing strongly. The operating margin rose 210 basis points to 12.4% in the first half versus a 330 basis points decline for John Crane.

Morpho is a healthy business with an EBITDA margin of 18% in 2015.

Glen Liddy, analyst at JP Morgan Cazenove, says the deal will strengthen the core businesses of the group and address the lack of earnings growth.

He estimates the first full year of ownership will boost Smiths’ earnings per share by 5%, while at the same time maintaining a healthy balance sheet.

‘We believe the merger will create a best in class technology and solutions provider in the sector. The proposed acquisition will also help Smiths to develop long-term recurring aftermarket services revenues,’ says Liddy.

JP Morgan’s target price is £12.50, implying 8% upside.

Issue Date: 21 Apr 2016