Engineering business Smiths (SMIN) has confirmed it is in ‘very early stage’ discussions about a potential combination of its medical division with US-listed ICU Medical.
It appears Smiths is (finally) responding to calls to break up the business. Analysts have historically argued the different divisions such as medical and detection, could be worth more as separate entities.
Management previously resisted these calls, but underwhelming trading earlier this year could have led to a rethink.
AJ Bell investment director Russ Mould flags that Smiths offers a diverse collection of business, including oil services, sensors for explosives and hospital equipment.
If the range of services under Smith were not as diverse, the company could benefit from cost-cutting synergies and a more streamlined strategy.
Broker Numis analyst David Larkam argues a merger may not provide the same upside as selling the business due to no disposal premium.
He values Smiths Medical at £3bn instead of the £2bn figure quoted in the press, highlighting a spin-off has been considered in the last decade ‘at a similar or higher price.'
Larkam says the potential deal is interesting considering Smiths’ recent investment, which is forecast to deliver growth from the year to July after ‘five years of top line stagnation.’
PLAYING CATCH UP
In March, shares in Smiths were under pressure on a weaker than anticipated first half performance, prompting investors to question if it can make up the difference in the six months to 31 July.
Weakness in Smiths’ core divisions and a £56m charge from US tax reforms were behind the disappointing trading, but volatile currency movements are a potential headwind in the future.
Since the half year results on 23 March, shares in Smiths have rallied 20.2% to £17.65.
