Smiths Industries is on the lookout for a big acquisition

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The Independent Online
SMITHS INDUSTRIES is on the lookout for a large acquisition that would mark a step change in the engineering group's attempts to build a world-leading business.

Keith Butler-Wheelhouse, Smiths' chief executive, revealed yesterday that the company had put in a bid for Sherwood Medical, a former division of American Home Products, but had been outbid by Tyco, the US conglomerate, which offered $1.8bn for the business.

He added that Smiths would consider buying parts of the aerospace division of LucasVarity, the engineering group, if it was put up for sale by its new owner TRW.

The comments suggest that Smiths is targeting larger acquisitions under Mr Butler-Wheelhouse than it did under his predecessor, Sir Roger Hurn. In the past, Smiths has tended to make buy a number of small bolt-on companies for its aerospace, medical and industrial divisions.

Alan Thomson, Smiths' finance director, said yesterday the company could afford to spend up to pounds 1bn on an acquisition while keeping its interest cover at about five times. The largest acquisition in Smiths' history to date was in 1987, when it bought a business for pounds 275m.

Smiths yesterday reported an 11 per cent rise in pre-tax profits to pounds 99m for the six months to 31 January, on turnover up 10 per cent at pounds 607m. Smiths said its continuing businesses had accounted for about half the revenue growth, with the rest coming from acquisitions. But almost all the profit growth was organic.

Smiths' growth was entirely down to its aerospace division, where profits grew by 42 per cent with the help of buoyant demand for its avionics products and improved operating margins. In the medical and industrial businesses, however, difficult economic conditions meant that profits were broadly flat.

Smiths' dependence on its aerospace business rattled the stock market, which marked the shares down 103p to 953p, even though the figures were broadly in line with expectations.

But analysts pointed out that Smiths' shares had risen sharply ahead of the figures.

Mr Butler-Wheelhouse stressed that the group had no plans to abandon its traditional dependence on its three divisions, and would continue to look for potential acquisitions in all three areas.

Market observers pointed out that Smiths has an exemplary growth record over the past 20 years. Sandy Morris, engineering analyst at ABN Amro, said the company was likely to carry on growing despite the economic conditions. "For Smiths, a recession probably means that they get 5 to 10 per cent earnings growth, not 10 to 15 per cent," he said.

However, he added that the company was suffering from the fact that growth prospects in its industrial and medical divisions are currently pedestrian, while the market is fully aware of the growth Smiths will achieve in its aerospace division.

Analysts yesterday pulled back their full-year profit forecasts to between pounds 230m and pounds 235m, mainly on worries about the growth picture in the United States, which is now Smiths' largest market. On a forward multiple of 18 - and in the absence of any corporate activity - the shares are seen as no more than a solid hold.