Although Sauer-Danfoss Inc. (NYSE:SHS)’s board of directors has unanimously approved the proposal and has expressed interest in pushing it through to completion by the end of the second quarter of 2013, some shareholders have expressed reservations. Accordingly, several law firms have launched legal investigations into the terms of the deal. While the outcome of these actions is unclear, they may collectively serve to delay the proposed buyout for months. At the same time, Sauer-Danfoss’s price action suggests that most investors believe the deal will go through without delay.
About Sauer-Danfoss (NYSE:SHS) and Danfoss
Ames, Iowa-based Sauer-Danfoss is a publicly traded company that is majority-owned by Danfoss A/S. It manufactures hydraulic systems, engines and electronic components for use in stationary and mobile pieces of power equipment. Many of the products that it makes and sells are controlled by advanced microprocessors and can react in real time to changing environmental conditions. Its most popular brands include TurollaOCG, HydroGear, Schwarzmuller and Comatrol. Most of its clients operate in the construction and manufacturing sectors. Sauer-Danfoss Inc. (NYSE:SHS) employs about 6,400 people and earned $181.8 million on gross 2012 revenues of $1.9 billion.
Nordberg, Denmark-based Danfoss A/S is a conglomerate that manufactures and distributes a variety of mechanical and electronic devices as well as components for a number of other manufacturers’ finished products. The company sells a full range of refrigeration and air conditioning components, including coils, compressors, condensers and valves. It also manufactures and distributes line components, temperature regulators, radiator equipment, floor heaters, flow control devices, ventilation equipment and melting systems. In addition to its heating and cooling operations, Danfoss operates motor-building and power equipment divisions that make starters, nozzles, pumps, valves and other internal-combustion equipment.
How the Deal Is Structured
Under the terms of this cash-for-stock deal, Danfoss A/S would issue cash payments of $58.50 per share to each outstanding Sauer-Danfoss shareholder as of a yet-to-be-determined record date. Regardless of when the deal officially closes, Sauer-Danfoss would provide a one-time cash dividend of 35 cents per share on March 29, 2013. Relative to Danfoss’s current share price of $58.75, the proposed deal represents a discount of about .5%. Relative to its pre-announcement share price of about $52, the proposed deal represents a premium of more than 10%.
Initially, this deal will take the form of a tender offer. At some point in March, Sauer-Danfoss shareholders will be permitted to exchange their shares for cash and relinquish their holdings in the company. If Danfoss A/S can increase its stake in Sauer-Danfoss to at least 90% of the company’s total outstanding shares, Danish law permits it to “seize” the company’s remaining shares and force holdouts to accept its cash offer. Since it is likely that there will be a few holdouts, the company expects to exercise this right. This issue might also be the reason for the aggressive legal maneuvering that followed the buyout’s announcement.
Complications and Legal Issues
Unlike the legal rumblings that follow most merger and buyout announcements, the current investigations feel more than perfunctory. It is worth noting that Sauer-Danfoss has traded above the $58.50-per-share offer price as recently as May of 2011. While this was a relatively brief spike, it may support the case that certain Sauer-Danfoss Inc. (NYSE:SHS) shareholders are trying to make.
Until an official breach-of-responsibility suit is filed, it must be assumed that this deal will go through according to plan. However, keen-eyed investors should watch this situation carefully for any material changes. It is entirely possible that Danfoss A/S will issue a revised bid without warning. If the company ups its offer to $61 or $62 per share, current shareholders could see an immediate return of between 4% and 6%.
Long-Term Outlook and Competitors in the Space
Assuming that the deal does go through as planned, newly-whole Danfoss A/S will find itself in a competitive position. In its European wheelhouse, the company enjoys a solid chunk of the market for its products and faces relatively little pressure from its competitors. In this part of the world, Danfoss’s main concern is likely to be a perennially weak economy.
In North America and some other parts of the world, Danfoss faces more competition. U.S.-based companies like Parker-Hannfin and Eaton Corporation, PLC Ordinary Shares (NYSE:ETN) operate in many of its core segments. For instance, Parker-Hannfin’s electromechanical controls compete directly with the microprocessor-based valves, switches and power components on which Danfoss relies to drive its sales.
For its part, Eaton is a major player in the power equipment and HVAC space. Both competitors are considerably larger than Danfoss with market values of $30 billion and $15 billion versus Danfoss’ MV of $2.85 billion. Several other large concerns may look to encroach on the Danish manufacturer’s turf with continued improvement in the North American economy. Accordingly, Danfoss may well reduce or eliminate its U.S. presence in the coming years.
Although this deal offers latecomers virtually no premium, there is a chance that it could be revamped in the face of significant shareholder opposition. Such a move would engender a violent positive readjustment in Sauer-Danfoss’s share price and may provide risk-seeking investors with an impressive arbitrage opportunity. Accordingly, the legal developments surrounding this proposed buyout bear watching.
The article Industrial Giant About to Get Bigger originally appeared on Fool.com.
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