Bottom Line: Quantum leap buy

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The Independent Online
YESTERDAY's acquisition by Wellman, the engineer, of a clutch of unwanted FKI subsidiaries makes good sense for the two companies involved.

It allows Wellman to make a quantum leap in size, increasing sales and the company's market value more than fivefold to pounds 54m and pounds 110m respectively. FKI rids itself of a rump of non-core businesses and reduces gearing to below 50 per cent.

Wellman has paid pounds 46m, or 11 times underlying post-tax profits, partly funded by a pounds 30m placing. FKI is also taking pounds 10m of Wellman convertible preference shares and pounds 6m of loan notes, which could leave it with between 11 and 25 per cent of Wellman.

FKI would have preferred an all- cash deal but was prepared to accept some paper to get agreement. It plans to sell its converted Wellman shares in the market at the earliest opportunity.

Wellman should know what it is buying: Alan Baxter, chief executive since November, used to work at FKI, where he was responsible for the companies Wellman has bought. They are profitable but none has obvious growth potential.

New shares have been issued at 36p, which is 10 times this year's estimated earnings per share. That may look undemanding, but Mr Baxter has to prove he can deliver while the FKI convertible stake will overhang the price.