The Investment Column: Mayflower finds new focus in US

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The Independent Online
Yesterday's $165m (pounds 101m) deal to buy South Charleston Stamping & Manufacturing by Mayflower Corporation should more than make up for the British body panel maker's being gazumped in June for Pullman, the US suspension equipment maker which was taken over by Tenneco. Shareholders are being asked to stump up pounds 38.2m in a three-for-20 placing and offer at 126p, but the 8p rise in the shares to 143p shows the enthusiasm for the deal.

The euphoria looks justified, given that SCSM is much more within Mayflower's focus than Pullman. The deal should propel its US panels operation from the number 15 position in the market to number four and bring in a string of blue-chip customers including General Motors and Mercedes, as well as increasing the current business with Ford. Already the dominant player in the UK market for outsourcing panel work, the enhanced global reach proved by SCSM, added to its design and engineering expertise, should enhance its credibility with the big motor manufacturers.

Mayflower is paying $137m in cash and will take on borrowings of $27.8m as a result of the deal. That will send gearing to a heady 200 per cent or so, after the goodwill write-off, but interest cover should remain above seven times, at worst. The company says the acquisition will be earnings-enhancing from day one, despite the lack of substantial rationalisation benefits from integrating the two businesses. The long-term prospects for this business look good, with less than 10 per cent of manufacturers' requirements outsourced in the UK at present, a figure that only rises to 30 per cent or so across the Atlantic. In the short run though, SCSM increases the group's exposure to the volatile volume end of the market, accounting for 30 per cent of sales in future. Hoare Govett's forecast of profits of pounds 32m next year, when the deal kicks in, would still put the shares on a forward p/e of 17. High enough.

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