Investment Column: Memorable debut for Smiths new boy

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The Independent Online
Keith Butler-Wheelhouse yesterday marked his arrival at the helm of Smiths Industries with the group's first bid for a quoted company for as long as anyone can remember. But while the agreed pounds 136m offer for Graseby may break new ground, it is very much in the Smiths' mould. Graseby's medical to defence equipment businesses should neatly bolt on to existing businesses in a similar fashion to most of the more than pounds 500m of acquisitions Smiths has made over the past five years.

It is also unlikely to be the last or the most spectacular move to be made by Mr Butler-Wheelhouse, who took over as chief executive from Sir Roger Hurn in November. Smiths has already indicated it has up to pounds 400m to spend on acquisitions and is ready to approach shareholders if it needs more. A pounds 1bn bid for BOC's Ohmeda medical gases and disposable products business, recently put up for sale, could still be in the offing.

That is not to belittle yesterday's deal, brokered by Robert Fleming, the City merchant bank. Even at 211p a share, a 41 per cent premium to Graseby's pre-bid price, the deal should be earnings enhancing. The benefits may be eroded by sterling's strength, with 60 per cent of Graseby's sales coming from overseas, but the medical fit looks very good. The company's medical pumps tend to be used in hospitals, while Smiths' are used outside. Equally, Graseby will give Smiths' Deltec operation access to markets outside the US. Meanwhile, the bigger company's "first-tier" supplier status with the US Department of Defense will provide heavyweight backing to Graseby's chunky $77m (pounds 47m) contract to supply chemical attack monitoring equipment to the US military.

Interim results from Graseby showing underlying pre-tax profits up 11 per cent to pounds 5.2m suggest that things are going in the right direction. The bid will be a bitter pill for John Hawkins, who only arrived as chief executive in May, but having seen the share price go nowhere for the past five years, shareholders would be well advised to follow the holders of 27 per cent of the shares who have already backed the offer. However, Smiths, up 9p at 804.5p, looks high enough on a forward p/e above 19, assuming profits of pounds 185 to pounds 190m in the year just ended.