Big-ticket battle for bus maker
News Analysis: A pounds 255m bid by Mayflower trumps an agreed offer for the bus and fire-engine maker Dennis
Tuesday 11 August 1998
Mayflower's offer, which was first mooted last week, trumped a previously agreed all-share merger between Dennis, and Henlys, which values the former at around pounds 210m at yesterday's closing share price.
Swedish industrial giant Volvo also entered the fray yesterday, announcing it intends to buy a 10 per cent stake in Henlys, in a move which was seen as a vote of confidence in the Henlys bid. Volvo's move also increases the chances that Henlys may raise its bid, as City analysts speculated that the Swedish company could help finance an increased offer.
Industry experts agree that a bout of takeover activity among bus-makers was long overdue and is a natural consequence of the changes in the UK and global bus industry. They believe bus builders have been forced to look for alliances by the twin needs of facing up to the power of the bus operating giants in UK and of acquiring the right critical mass to expand overseas.
Last night the Henlys board said it was still "actively reviewing its position ... and will respond in due course" but insiders said the bus- maker was looking at increasing the value of the share offer or at changing its nature and going for a cash bid. The Dennis board, which had recommended the original Henlys merger, said it was still waiting for "clarification" from Henlys and advised its shareholders to take no action until Henlys' intentions become clearer.
The events left Henlys share price, boosted by Volvo's interest, 48.5p higher at 577.5p, with Dennis up 13p to 469p and Mayflower, hit by the prospect of a prolonged bidding war, down 10.5p to 184.5p.
But aside from the financial details, which still favour Mayflower, the strategic arguments of the two contenders are very similar. In the Mayflower camp, John Simpson, the chief executive, argues that Dennis "fits like a glove" with Walter Alexander, Mayflower's bus-making unit. The business makes bus frames, which could be "inserted" on to Dennis chassis, offering bus operators a "one-stop shop" for all their bus needs .
This would cut production costs and would benefit operators as it avoids the costly and time-consuming process of mixing and matching bodies and chassis, the Mayflower chief executive believes. Walter Alexander and Dennis - which in 1997/98 had sales of pounds 288.5m and profits of pounds 19.5m - have already co-operated on a range of low-floor double decker buses, which have been sold to major bus operators. On the international side, Mr Simpson, the man behind last year's aborted bid by Mayflower for its much bigger rival Vickers, stressed how the two businesses could build on their strengths in the US and Asian markets by, once again, offering customers an integrated body-chassis service.
But most of the arguments used by Mayflower are echoed among Henlys supporters. Experts point out that Henlys is the UK leader in bus-bodies and vertical integration with Dennis chassis activities would enhance its domination of the UK market and achieve some cost-savings. On the international front, Robert Wood, Henlys chief executive, said yesterday Volvo's involvement would give the merged group access to a large distribution network in some 60 countries around the globe. He raised the prospects of exclusive agreements and joint ventures with Volvo which would give the new entity a considerable presence on the international stage.
Whatever the outcome, the outbreak of a bidding war in the once-sleepy bus-building sector is set to have far-reaching implications.
On the domestic front, the deregulation of the transport market, carried out by the Conservatives between 1980 and 1985, has encouraged consolidation among bus operators. As a result, after more than 13 years of aggressive acquisitions, the UK market is controlled by five giants, Stagecoach, FirstGroup, Go-Ahead, National Express and Arriva, which have swallowed up most of the regional and local companies freed up by deregulation. This left them with a huge degree of buying power vis-a-vis their suppliers, which enabled them to put a squeeze on bus makers' prices and margins. In this respect, a tie-up between two bus makers is seen as an effective way of counterbalancing the bus companies' bargaining power. According to Tim Kluczwoski, an analyst with Granville Davies: "The bus operators have become much bigger in the last decade or so and they have been able to push through large orders and have been able to put pricing pressures on bus makers." This effect has been magnified by the operators' drive to replace their ageing fleets and to acquire more user-friendly vehicles, such as the low-floor bus developed by Mayflower and Dennis for disabled users.
Despite the overall fall in the number of passengers, bus companies also had to replace double deckers with single deckers as passengers and traffic changes called for a leaner and quicker means of transport (see chart).
Last year, UK bus companies bought more than 2,700 new buses, a 12 per cent increase on the previous year.
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