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Weir keeps everyone guessing on Finnish elephant in the room

THE thing that screams out of Weir Group's latest trading statement is the lack of any mention at all of its bid approach to Metso Corporation of Finland.

Perhaps the Glasgow-based engineering company's silence makes some tactical sense, if it is playing a game of cat-and-mouse with Metso.

But that does not change the fact that the absence of any reference is by a long way the most interesting thing in the Weir trading statement, published yesterday morning.

For Weir's top brass, it would appear Metso is the elephant in the room, or the norsu, if you prefer it in Finnish. And the Weir board, including chairman Charles Berry and chief executive Keith Cochrane, did not shed any further significant light on what may or may not happen in relation to Metso at the company's annual meeting in Glasgow yesterday afternoon.

Weir, having told the stock market on April 16 that its indicative "merger" proposal to Metso had been rejected by the Finnish company and there was no certainty it would revise its terms, was not obliged to provide any further details about the situation.

Mr Berry said there was no change on the Metso situation, and that Weir still saw compelling logic in the combination, pretty much echoing the April 16 statement.

And Mr Cochrane appeared to be at pains to signal, while avoiding any direct discussion of Metso, that there were plenty of fish in the sea when it came to his company's acquisition ambitions.

However, it was impossible not to speculate that the chief executive's comments, like those of some spurned suitors, might have been made at least partly for the benefit of Weir's actual object of affection, Metso.

Mr Cochrane declared: "There are some interesting opportunities out there and, in the main, I'd have to say that price expectations of sellers are tending to be pretty sensible...

"I'm relatively relaxed whether it is large or small, provided it hits strategy and the financial returns make sense."

And Mr Berry cited a "suite" of opportunities.

The deal which Weir proposed to Metso, while described as a merger, was effectively a takeover in that the Scottish company is by far the larger of the two.

Weir proposed an all-share merger under which Metso investors would have received 0.84 of the Scottish company's shares for every one they held in the Finnish engineer. This proposal would have resulted in Metso shareholders owning about 37% of an enlarged group.

Metso did not mince its words when it rejected Weir's overtures on April 16, declaring: "The Metso board remains extremely positive and confident in Metso's standalone growth and value-creation prospects by pursuing its current strategy. As a consequence, the board has rejected Weir's proposal and sees no reason to commence discussions regarding a potential combination."

We should not underestimate the scale of the norsu in the room.

Metso is a company with a stock market worth of about €4.3 billion (£3.5bn). Weir last night had a stock market value of about £5.6bn.

So Metso would enable Weir, with one move, to achieve a real step-change in scale.

It is difficult to tell whether Weir is actually moving on from the Metso situation. It still appears to be carrying a torch for the Finnish company, but it is not plain whether it is doing so more in hope than expectation.

After yesterday's trading statement and annual meeting, we are none the wiser about whether or not Weir will pursue the Metso situation.

What is absolutely clear is that consolidation is very much in fashion in the global engineering sector, as shown by US giant GE's overtures to Alstom of France.

Weir has, over the decades, found itself on both ends of takeover action.

Fifteen years ago, Weir rejected a 300p-a-share bid approach from US sector stablemate Flowserve Corporation. This approach valued Weir at £611 million. The weakness of Weir's share price back then attracted Flowserve. The Glasgow-headquartered company's shares traded below 200p in early 1999.

Having enjoyed great success in the intervening period, with a combination of acquisitions and organic growth, Weir's share price has climbed to more than £26.

However, the company's overtures to Metso hit a stumbling block soon after they emerged.

On April 1, the day on which Weir confirmed it had made the approach to Metso, the Finnish state came out against such a combination. State-owned investment company Solidium, speaking for its 11% stake in Metso, signalled it was not merely a matter of price, with managing director Kari Jarvinen declaring: "I don't think this is the right time to sell Metso to Weir Group, or to sell it to anyone."

This stance might represent a very big obstacle to any future deal, even if Weir were to revise its terms.

Weir felt the same way, about not being the right time to sell out, when it received the Flowserve approach.

The Glasgow company is now, from its point of view, on the front foot on the merger and acquisition scene.

With the Metso approach, it has made plain its desire for a deal.

The City, and Weir's investors, will be waiting with bated breath. But, by sticking its head above the parapet, Weir might attract the attention of bigger players in the sector as the consolidation drama plays out.

The key to Weir remaining on the front foot on the global engineering stage, rather than ending up on the wrong end of a bid, is for it to continue to deliver strong results and keep the share price high as it seeks a deal.

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