Vickers looks vulnerable to GKN bid

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The Independent Online
The continued weakness in the Vickers share price (181p) makes it look increasingly vulnerable to a bid. The favoured candidate remains GKN. The two companies have chatted in the past about an alliance but nothing of substance has materialised. Engineering industry insiders believe this is a function of GKN's ambition to secure an agreed deal given the sensitivity of Vickers' defence activities and its ownership of Rolls- Royce Motor Cars. Rolls-Royce, the aero engine manufacturer, has rights over the prestige motor marque that could complicate a change of ownership particularly if a bid for Vickers was hostile.

However, as the Vickers share price weakens, the temptation to put aside the risks associated with hostility grows. Under CK Chow, the chief executive, who took the helm in January, GKN has made no secret of its ambitions to expand the group across all its activities, and recent history shows that acquisitions are very much part of that process.

The logic of a bid is well rehearsed but it is the share price performance of the two companies that is most compelling. In early 1995 Vickers shares traded at a depressed 170p while GKN's price languished at around 550p. From that point onwards both shares took off. Vickers hit a high of 300p in October 1996. In the same month GKN peaked at 1,172p. Since then both shares have weakened but the broad correlation between the two has vanished. This month Vickers was down to 170p, its early 1995 level. GKN's low this month has been just 920p, well above those early 1995 doldrums.

Both companies are victims of a strong pound. Both companies, as engineers, are exposed to concerns about a recession in the next 18 months. The share price tells you that GKN (998.5p) is judged to be much better placed to deal with these difficulties.

If GKN resists the temptations of Vickers' lowly share price, others may be less considerate.

An engineering bid would make a welcome break from the continued speculation about takeovers in the banking sector. The most amusing but futile game in town is to pick a new bidder for National Westminster. However, more productive gossip is to be found elsewhere. The Scottish banks look particularly interesting where there is renewed chat that HSBC (2087.5p) wants to offload some its cash north of the border. The theory is that Sir William Purves, HSBC's chief and himself a Scot, is emotionally attached to the notion of bringing one of the home country banks into the HSBC fold afore he goes.

Anyone subscribing to this theory could do worse than look at Royal Bank of Scotland (631p) where HSBC has been rebuffed in the past. Even without a bid Charterhouse Tilney reckons the stock is due for a rerating.

The banking sector has been buoyed by takeover talk but also by an appreciation that it benefits from a low inflation environment. So far the new Labour government, aided by the Bank of England's Monetary Policy Committee, has shown it is prepared to carry on the fight against inflation. So far we have had an interest rate rise a month since Labour came to power and another one is expected next month. That has not helped those companies suffering from a strong pound and the list of businesses reporting that profits are hurting as a result of sterling's strength grows daily.

Watch then for investor attention turning to stocks with largely home grown earnings. A number of water company annual meetings this week will reinforce interest. The companies have taken the windfall tax in their stride and are back in vogue with some shares reaching record levels. As havens from the pound's strength there are worse refuges.