Beyond the City limits?

Is Weir Group a success story the market is missing, asks Peter Koenig?
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The Independent Online
SIR RON GARRICK, chief executive of the Weir Group - the pumps- to-nuclear-waste-handling engineering company - has been dealt a lot of tough hands since he raised the one-time gem of Clydeside shipbuilding from its deathbed in the early Eighties. But the hand he will play tomorrow could be the trickiest.

Where others see grimy engines, Sir Ron sees opportunity. Pumps - ranging from 20,000 horsepower behemoths in the Saudi desert to pounds 29 DIY car parts - are linked to the restructuring underway not only in shipbuilding, but also the oil, power generation, and other heavy industries.

"As these industries consolidate, pressure mounts for the pumps industry to consolidate," explains Thomas Gutzwiller, a general manager of Sulzer, a Swiss rival to Weir. "Global clients increasingly want global single sourcing of pumps."

Sir Ron has positioned Weir to survive the impending shake-out. "We're in acquisition mode," he says. "We're thinking about things up to pounds 150m - the size of our acquisition of EnviroTech in 1994."

Weir would have little problem financing such a deal. "We had pounds 40m in the bank at our interims last spring," he notes.

But the coming shake-out in the pumps industry could just as well threaten Weir's independence - put it at the receiving rather than launching end of a bid. The British engineering sector, along with the London stock market as a whole, took a dive after Russia's collapse in August. Unlike telecoms or IT, however, engineering stocks have not rebounded. From their 22 May peak of 288p, Weir shares remain 50 per cent down, closing on Friday at 202p.

This is what tomorrow is about. On Monday afternoon, Sir Ron and three colleagues will meet 50 engineering company analysts in the City.

"The object will be to get the City to think about Weir as a distinctive company, not simply as part of the down engineering sector," says Sandy Morris, an ABN Amro analyst.

"It's delicate," says a second analyst. "Sir Ron doesn't want to say the City is undervaluing Weir shares. The City has heard all that before and learned to run when it does hear it. But Weir shares are undervalued in my opinion. Garrick needs to explain why."

Weir's meeting with analysts tomorrow could easily be cast as industry versus City, long-term good guys versus short-term bad guys. What's striking, however, about both sides in this pseudo-melodrama is how clued up each side is about the other.

The conversation between industry and City progresses from minute to minute. Sir Ron understands why the City has sold off Weir's shares. City analysts understand where Weir is coming from when the company suggests its shares are cheap. Both sides muse about what this stand-off means for UK Plc.

"If the Government were on top of things, it would find a way to help manufacturers like Weir ahead of the curve rather than ploughing money into manufacturers like Rover behind the curve," says an analyst.

But neither side expects tomorrow's meeting to change the situation much. Weir's shares look set to remain depressed - at least for the next few months - even though now is the time for Weir to go for growth in 1999 by making a major acquisition.

Both sides recognise that, as a result of inaction, Weir could end up on the receiving rather than launching end of a takeover. The question is how does a British pump-maker with a lacklustre share price buy an American or continental European pump maker with a lacklustre share price - and thus breathe new life into the country's troubled manufacturing sector - before the Americans or continentals gobble it up?

"It's Catch-22," says Richard Hughes, the manager of M&G's Recovery Fund and one of Weir's large investors.

For the better part of 20 years - since Weir was rescued by Sir Ron and a grant from the Scottish Development Agency - the Glasgow-based company has done what has only recently become the mantra of Western manufacturers: it has sought to compete by adding value to products through brainpower, not low labour unit costs.

In 1997, with GE Nuclear of the US as main contractor, it supplied the main steam isolating valves and safety pumps for the Lungmen nuclear plant in Taiwan. It has also done good business in China, working with GE and others building power generators. It recently supplied the complex pumps required to move Sudanese crude to the Red Sea through an over-the- desert pipeline.

"We don't just make pumps," says Emrys Inker, the company's spokesman. "We make pumps no one else can make. We tend to work on large industrial projects."

Without over-extending itself, the company has spread its bets. It operates engineering services and materials handling divisions. But pumps still account for more than half the business. This is split by function - naval and marine, minerals processing, water supply and sewerage, oil, gas, refining and chemical, and power generation. It is also split geographically. The 1994 acquisition of EnviroTech, a Salt Lake City, Utah-based maker of pumps for abrasive as opposed to clear fluids, secured Weir's foothold in the US. In Asia, meanwhile, it has concentrated on India as well as China, but shied away from the former Asian tigers.

The upshot is respectable numbers. In 1997 Weir reported record pre- tax profit of pounds 60.1m on sales of pounds 636.8m. This autumn it reported record half year pre-tax profit of pounds 37.4m. The average estimate of City analysts is that 1998 earnings per share will be 22.47p, up modestly from 21.5p in 1997.

"There's a huge mismatch between the City's prognosis for us and what we're actually seeing," says Sir Ron. "Our short-term order prospects are as good as they've ever been. There are a number of projects shaping up well toward the end of the year."

Here Sir Ron goes into industrial-ambassador-diplomat mode. "I'm not saying the City is not right about our prospects 18 months out. That's what the City does - judges what's ahead for us. If there's a recession, the situation will get difficult. What I'm saying is that our order book for this year is meeting our expectations."

The City take on Weir, meanwhile, goes like this: analysts do not disagree with Sir Ron. They respect Weir's stoicism in the face of the strong pound.

"A lot of manufacturers started screaming when the pound hit DM2.7," says an analyst. "Weir never complained. It said that even though it wouldn't like it, it could live with the pound at DM3." This does not, however, change the City's negative view of the company, at least in the short run.

"Everything good said about Weir is probably true," commented M&G's Hughes. "But look at it from a fund manager's point of view. Weir shares have under-performed the all-share index by 60 per cent since 1995. The pounds 1,000 you put in three years ago is worth pounds 400 today. And the outlook for the company is probably worse today than it was three years ago. Meanwhile, fund managers are under intense pressure to match the FT-SE All Share index. More and more money is going into index-linked types of investment. If you were facing that situation, what would you do? Buy Weir or some telecom or IT shares?"

At the meeting with City analysts tomorrow, Weir will attempt to jog this mind-set by suggesting that, despite the economic downturn, it is capable of generating above average returns in 1999 if it can grow through acquisition.

To those who suggest that Weir is only the seventh largest pump manufacturer in the world - and thus a likely candidate to be bought rather than buy - Sir Ron will reply that in its chosen fields, Weir counts as one of the top three or four pump makers.

Giants like Germany's KSB and America's IT&T, as well as Sulzer, he will suggest, do not consider pumps as their core business and so are prone to be sellers, not buyers.

There will also be questions about Weir's management. In the company's 1997 annual report, Lord Weir, the chairman, indicated he was preparing to retire. Sometime next year, Sir Ron will almost certainly step up into the chairman's role in an executive or non-executive capacity, and a new face will take over as chief executive.

The conversation between Weir and the City will continue even if it resolves nothing. The only safe bet is that the shake-out in the global pump business will happen.

"On a three-year time frame, there will be a significant number of mergers," predicts a City investment banker specialising in engineering mergers and acquisitions.

City analysts are rooting for Sir Ron. They want him to play his tricky hand skilfully. They want Weir to emerge from the industry shake-out British- owned, Glasgow-based, and bigger.

But ask them to peer into their crystal balls and they turn broody.

"The City could bid up Weir's shares on the prospect of it making an acquisition that will build market share," muses an analyst. "Typically, though, that's something Wall Street does, not us."