Invensys shares tumble amid fears over banking covenants

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The Independent Online

Invensys was accused of going for a fire sale of assets after its long-awaited presentation of a new strategy at the company indicated that its disposals would fetch a poor price.

The engineering group's shares also suffered from its admission that it would not know for sure whether it had breached banking covenants until next month.

The company said March was a crucial trading month, the last of its current financial year, and it would only know at the end of that month whether its earnings covered interest payments by the required ratio.

Invensys said it was "confident" of making the covenant terms but the doubts over its March trading were enough to prompt an already jittery market to sell off the shares, which collapsed 12 per cent to 96p, on heavy turnover of 158 million shares.

The company said it would dispose of two divisions, industrial components and systems, over the next year, which together accounted for sales of £2.3bn, or a third of group revenue.

However, Invensys said that it would to get at least £1.5bn for the businesses – well below market expectations of a price equal to the level of sales and dubbed a "fire sale" price by one analyst. Rick Haythornthwaite, the chief executive since October, said it was "unrealistic" to expect one times sales for the disposals.

Analysts said that, not only were the expected proceeds disappointing but the low figure cast doubt on the valuation of the rest of Invensys.

Colin Grant, of Dresdner Kleinwort Wasserstein, said: "The multiples being looked at are below market expectations and it raises questions about the remaining businesses."

Mr Haythornthwaite said the divestments would "fundamentally" change the shape of Invensys and double its growth rate to 7 per cent a year. He added that the 1999 merger of Siebe and BTR that had formed the company had proved a failure.

"The merger produced a random complexity, not an ordered complexity, as you have at ABB or Siemens. The company was never properly put together. The merger was never completed.

"But I am convinced that hidden within this company is a viable entity."

Invensys will now focus on two core divisions, production management and energy management which together provide annual sales of £4bn and move the group away from manufacturing.

Andy Chambers, an analyst at Commerzbank, said: "This gets Invensys back to where Siebe came from, managing the cost efficiencies of customers, without the production focus of BTR."

Mr Haythornthwaite said that, even if his strategy only delivered half of what was promised, it would still provide better returns than the alternative of simply selling off all the parts of the company.

The targets he set were long term, with delivery against a series of benchmarks due in 2006. The group's operating margin target, due to increase from 9 per cent to 15 per cent by 2006, was dubbed "highly ambitious".

A number of analysts said Invensys had been unfairly punished by the panicky markets yesterday and they pointed to the work of hedge funds, that may have sold the stock after the company ruled out a break-up strategy.

A "development" division was also being created, which contained businesses with sales worth £700m a year, which may also be sold off.

On current trading, Invensys said the picture was "mixed" with early signs of recovery in appliance and climate controls offset by continued weakness in telecoms and IT.

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