Broker snap: Melrose unlikely bidder for De La Rue

3rd Dec 2010 13:22

Shares in crisis-torn bank note printer De La Rue are down by a third over the year but up by one sixth in the last week, with the recent good run driven, in part, by rumours of a takeover.One company name in the frame to take over De La Rue is turnaround specialist Melrose, but Panmure Gordon thinks a bid from this source is unlikely, though it would not be surprised if Melrose has taken a look at De La Rue."In our view the deal needs some give in the funding equation - either a material slippage in De La Rue's market value from current levels or for Melrose to raise more funds through selling parts of the FKI portfolio," analyst Oliver Wynne-James suggests. "In addition to the pension issue we notice that relative to peak market value levels there is much less upside with the De La Rue opportunity compared to that on offer with the FKI acquisition," Wynne-James added.In short, without "raising material amounts of fresh equity" then Melrose does not have the readies to launch a bid at a knock-out price of 800p per share for De La Rue."A knock-out bid for De La Rue may command an enterprise value of £872m but we can only identify 'comfortable' funding of £695m. Issuing too much new equity would just upset the share incentive plan which matures in May 2012 and which rewards the management team's hard work for turning around FKI. Yes, Melrose could sell some FKI assets but apart from Bridon it looks an immature point to offload the portfolio. FKI assets are also the means to keep the current share price ticking along nicely until May 2012 in order to satisfy the upside for the share incentive plan," the broker said.Melrose is also adverse to taking on further pension obligations, of which De La Rue has plenty. "The deal killer however looks to be De La Rue's pension position. Melrose has a similar stack of pension liability and in our view has to look for solutions first before entertaining further additions (the latter could generate flaws in its buy and dispose model)," the broker suggested.Panmure Gordon rates Melrose shares as a "buy" and has a target price of 340p for the stock.