Metso is a Finish Industrial machinery maker which serves mainly the Mining and Construction, Automation and Pulp, Paper and Power Industries.



Metso was formed in 1999, when Valmet, a machinery maker for the Pulp and Paper industry merged with Rauma, which specialised in areas like rock crushing and flow control.

In the course of 2013 however, Metso decided to split again. From the beginning of January 2014, Metso shareholders will get shares in Valmet, the Pulp and Paper machinery maker.

Looking at the long-term stock chart, we can clearly see that Metso recovered from the 2009 slump, but never made it back to the old all time highs from 2007:

In the case of the demerger, Valmet is clearly the “dog”, with margins only half the level of the Metso “core” business.

This is a snapshot from the recent Valmet investor day presentation:

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Valmet is clearly not in “Great shape” at the moment, as both of its main customer segment, Pulp & Paper and Energy are not the most attractive areas as we all know. Wheras Valmet targets 15% ROCE (up from current 5-6%), the “new Metso” targets 30% ROCE from current 16-17%. However, as we all now, it’s often the “dogs” which are often the more attractive part of the demerger.

At the recent investor day, Valmet also provided a snap shot of the financial position:

The complete demerger prospectus can be found here by the way.

So Valmet will be spun off with no debt and ~820 mn Equity. With around 150 mn of shares, this translates to around ~ 5,50 EUR per share in book vale. A first reference point for the share price of Valmet post demerger. However the seem to take over some 100 mn in pension liability which have to be added to enterprise value.

For an armchair investor like myself, it is also quite nice to be able to look at the new managemnt in this webcast. First impression: Nothing flashy, but very solid. . This is the new CEO:

Comparison to other cases like Osram

I think it is unrealistic to expect a similar quick price increase like Osram for a few different reasons.

First, Valmet doesn’t have any “sexy” growth businesses like Osram’s LED division. Secondly, Siemens is a stock held to a large extent by index funds and “almost index funds” due to its large market cap. So there were a lot more “forced” sellers. Nevertheless, I think that a lot of the “usual” suspects like Einhorn and Co. will look closely at this and most likely invest.

The role of Cevian / Cookson Plc Spin off

Cevian, the Swedish activist fund, has a 13% participation in Metso. They started to lobby for a demerger already in 2005 according to this Reuters Article. Interestingly, only in 2012 Cevian crossed the 5% threshold before disclosing 13.3% a few months ago.

Cevian quite often uses break ups and spin offs as their “value enhancing” tool. In the past for instance they used this strategy with UK based Cookson. According to this article, at Metso the seemed to have tamed up with Carl Icahn in 2005 but somehow “big Carl” seemed to have lost interest.

I found this very interesting interview of the Cevian Cofounder from 2011. Another, rather positive article of Cevian can be found here.

The Cookson spin-off/demerger looks somehow similar. interestingly enough, in The Cookson demerger, Vesuvius was seen as the ugly part and Alent as the “sexy” growth business according to this fT article. Although in the Cookson case, Vesuvius was the bigger part.

Burdened with Cookson’s hefty pension liabilities, Vesuvius was touted as the unwieldy tortoise to Alent’s hare, given the smaller group’s focus on providing electronic parts used in tablet devices, computers and smartphones.

This FT article clearly went into the same direction in December 2012:

“We expect group sales for Vesuvius to decline by 9 per cent year-on-year in 2012, followed by an 11 per cent decline in 2013,” say analysts at JPMorgan Cazenove. “The weak demand from both the steel and foundry industry towards the end of 2012 is likely to result in trading profit margins slipping.”

SO let’s look how the two parts performed:

So the “Ugly duck” Vesuvius outperformed the good part by more than 50% in the year since the demerger. Cookson demerger presentation can be found here.

A final word on the “new” Metso

The “new” Metso is pretty much an Emerging MArkets / Commodities play. As I am still not really bullish on EM and commodities, I would not want to buy it, but if the outlook changes, this would be a more attractive way to invest in EM than any direct investments.

Summary:

Overall, I think at a first glance, the Metso Spin-off Valmet offers a potentially interesting situation, especially for “underdog” Valmet which ticks a lot of the boxes required for an interesting spin-off investment:

+ Valmet is clearly the “unwanted” part of the deal

+ the spin-off will happen at historically depressed margins, good mean reversion potential

+ solid financial position at spin-off, cash flow should not be an issue

+ clearly negative sentiment and most likely depressed prices

+ new and young management (

The only “minus” is that the new management doesn’t seem to receive a special share allocation etc.

If Valmet trades around book value, this would mean an Enterprise value of ~ 950 mn EUR. In the past, Valmet generated an EBITDA of 200-250 mn EUR p.a.. Although 2013 will clearly be worse, I think a valuation of 4-5x EV/EBITDA based on historical average margins would be quite attractive and imply a good upside over 3-5 years.

So let’s wait and see how Valmet will trade in January and then make a final decision.