Devro International, the sausage skin manufacturer, is to acquire the entire share capital of its United States competitor, Teepak, for $135m (£85m). At the same time the company announced a 14 per cent increase in pre-tax profit to £29.1m for the year to end December.
The deal takes Devro into the cellulose sausage skin market, which is substantially bigger than the company's traditional collagen market. As well as taking out a competitor, the deal solves a capacity shortage. Teepak has a turnover close to £200m, so the takeover will have the effect of trebling Devro's 1994 turnover of £98.3m.
The deal will be financed by Teepak's shareholders taking $90m worth of new Devro shares and $45m cash, raised by placing new Devro shares with City institutions.
Graeme Alexander, Devro's chief executive, said: "There is a very nice complementary fit. It's going to release a lot of synergies going forward."
Teepak has big sales forces in the US, Germany and central Europe, where Devro is weak. Devro has a large presence in Asia-Pacific, where Teepak is weak.
Devro's profits grew on the back of increased operating margins, which rose from 27.8 to 29 per cent in 1994.
Collagen is taken from animal hide and used as a natural alternative to animal gut for the manufacture of sausage skins. Cellulose is an non- edible sausage skin alternative popular on the Continent.
Julian Hardwick, food analyst at BZW, is predicting Devro's existing business will contribute £32.5m pre-tax profit for 1995. Teepak's impact on the year's results depends on the timing of the US Federal Trade Commission's approval, which is still outstanding.
Mr Hardwick said: "This is a buy. The earnings will be increased by the deal and long-term prospects have been improved. It deserves a higher rating than it's currently got."
Earnings per share are 16.4p, up from 14.8p last year. The dividend per share is 7.05p, up 13 per cent on 6.25p last year.