Scenarios: Will Xinmao spark a bidding war for Draka?

By Greg Roumeliotis

AMSTERDAM (BestGrowthStock) – If China’s Xinmao Group shows it can deliver on its 1 billion euro offer for Dutch cable manufacturer Draka, the focus will be on the reaction of its European rivals, Prysmian and Nexans.

Draka’s management had agreed to an 821 million euro cash-and-share offer by Italy’s Prysmian, when Xinmao gatecrashed the party with its cash offer. France’s Nexans, the market leader, then said on Wednesday it was dropping its 731 million euros bid but said it was monitoring the situation.

Here are some possible scenarios if Xinmao’s bid proceeds:

PRYSMIAN RAISES ITS BID

Prysmian has said it will not raise its bid for Draka, but analysts say it could muster a higher offer to trump Xinmao and still make large savings. But it would need to tap its investors for cash in order to go ahead.

Prysmian denied it was in talks with Draka after Nexans launched its bid in October, only to unveil an agreed bid later. Some analysts argue that any denial from Prysmian’s management about a higher bid should be seen in that context.

But an attempt to outbid Xinmao will test Prysmian’s plan of generating approximately 100 million euros of annual run-rate synergies within three years.

“They have headroom to increase their bid, but they would likely have to share more of benefits from the synergies with Draka’s shareholders, and I don’t think there is much appetite for that,” Petercam analyst Paul Schuller said.

NEXANS RAISES ITS BID

ABN AMRO analyst Maarten Bakker estimates Nexans could pay up to 17.5 euros per share for Draka if its offer is solely financed by debt, and more than 20 euros per share if it uses an equity issue.

Like Prysmian, Nexans would also therefore have to do a cash call to match Xinmao, yet it faces restless shareholders whose support even for its original 15-euros-per-share offer was not certain and who are unlikely to support a rights issue.

Nexans said on Wednesday it was still following the situation with interest.

“I don’t think any significant new bid from Nexans is likely, it would face severe resistance from its shareholders,” ING analyst Tijs Hollestelle said.

NEXANS AND PRYSMIAN TEAM UP TO BID

Speculation that the two companies could put in a joint bid and then divide up Draka’s assets between them came about when Nexans indicated it would sell off the division at Draka which supplied cables to the telecoms market.

Nexans’s chief executive told a Dutch newspaper that the division, which accounts for about a third of Draka’s sales, would be sold.

Xinmao has ambitions to tap Draka’s technology and market share to expand in the Asia Pacific region and this threat to the emerging markets strategy of Prysmian and Nexans could spur them to take joint action.

But while a joint bid would ease the strains of financing a takeover, analysts say the two companies would struggle to agree on how to divide up the assets, making a deal unlikely.

“The cable market is already very fragmented, these companies are looking to consolidate it,” Petercam’s Schuller said. (Additional reporting by Nigel Tutt in Milan and Gilles Guillaume in Paris; Editing by Sara Webb and Alexander Smith)

Scenarios: Will Xinmao spark a bidding war for Draka?