Bottom Line: Siebe goes back to the rights-issue well

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The Independent Online
RIGHTS issues are a tricky subject with Siebe. The acquisitive company drew flak in the mid- 1980s when it had a habit of making rights issues on an annual basis. Hence chairman Barrie Stephens' assertion yesterday as he revealed the current fund- raising that it was in no way contrary to his pledge that rights issues would not be made to 'cosmeticise' the balance sheet.

Whether that is the purpose or not, the rights issue does have the effect of reducing gearing and appears larger than is needed for the stated purposes of buying Eckardt and refinancing Eberle and Schmidt. In addition, it is not immediately obvious why Siebe chose to raise pounds 184.3m at this time. It only has to find DM30m ( pounds 12m) for the initial Eckardt payment and pounds 27.3m to refinance the Eberle and Schmidt businesses bought earlier this year. The final DM179m Eckardt payment is not due until October 1994.

Mr Stephens says that the rights issue was not any smaller because the board was advised that a one- for-ten issue was the smallest it could launch. He also stresses that the rights issue is in no way 'opportunistic'. But this is to bandy words.

That aside, Eckardt looks a good buy. It is a neat fit with Siebe's existing businesses and particularly Foxboro's European activities. And, although it looks like Siebe has paid a lot of money for a company that lost DM6.1m last year, the trading figure is misleading. The existing management has spent approximately DM20m in the past 30 months on restructuring and severance, and Siebe's board believes that the DM29.1m net assets have been considerably understated.

The company had sales of DM230.7m last year and a gross margin of 35 per cent, so once the restructuring is successfully completed it should generate large amounts of cash. Siebe is very bullish and anticipates turning it into a major cash generator within 12 to 18 months.

Indeed, Mr Stephens has predicted that there will be no dilution of earnings. Others are not so sure. Nomura believes there will be mild dilution both in this and the next financial year.

At yesterday's closing price of 573p, the shares are on a prospective multiple of 19 and look expensive. Bearing in mind the flawless logic of the deal, the rights should be taken up and the shares bought on any weakness for the long term.