SHARES in Weir Group surged by more than six per cent after it unveiled a major acquisition in the US and revealed plans to offload its loss-making flow control division, which supports the renewable, conventional and nuclear energy sectors.
The Glasgow engineering giant has agreed a $1.3 billion (£920 million) deal to buy Oregon-based ESCO Corporation, which provides ground engaging tools (GET) to the surfacing mining and construction industries.
ESCO booked underlying profits of $68m last year on revenues of $632m, which are expected to grow to $80m and $675m in 2018.
Under the terms of the deal, ESCO shareholders will receive 59% of the deal value in cash, which Weir will part fund with a placing of new ordinary shares to institutional investors. The new shares will represent around 7.4% of Weir’s share capital.
Weir said a combination of the ESCO deal and the sale of its flow control business will allow it to focus on its core minerals and oil and gas markets. The flow control division, which designs and manufactures valves and pumps and provides services to the global power generation, industrial and oil and gas industries, reported an operating loss of £3m last year. Its revenue had increased 4% to £365m.
Weir said it would use the proceeds from the sale to reduce debt and fund future investment to grow its minerals and oil and gas divisions.
Chief executive Jon Stanton said: “Today we are announcing an important development to our portfolio as we focus on building on our core strengths in minerals and oil and gas.
“The acquisition meets our near-term financial criteria before we pursue the revenue opportunities from bringing ESCO products into new markets through our global network. We are acquiring a high-quality business at the right time, with the market in the early stages of its recovery, providing opportunities for long-term growth.”
Weir’s oil and gas division returned to profit last year on the back of the shale gas recovery in the US, driven by the revival in oil prices following their sharp downturn in the latter part of 2018. And last year it flagged the continuing momentum of its minerals division.
Those trends were underlined yesterday as the firm reported a 22% rise in first quarter orders amid improving market conditions. That included a 50% rise in oil and gas orders driven by demand for pressure pumping in the North American shale industry, reflecting an increasing rig count and activity levels. It added that conditions in international markets were “modestly improving”, although it noted that pricing remained competitive.
In mining, Weir’s biggest market, the company said orders rose by 13%, including a 19% rise in orders for original equipment. Orders from the after-market sector rose by 11%. Weir noted the growth came as global mining markets continued to benefit from supportive commodity prices, adding it was reaping dividends from investment to extend its “on-the-ground” engineering and sales capabilities.
The flow control division saw orders climb 2%, with the firm highlighting encouraging momentum in its core markets, as well as operational improvements.
Mr Stanton said: “The group performed strongly in the first quarter, outperforming its main markets through an intense focus on helping its customers meet their operating goals in improving conditions.”
He added: “Our good start to the year reflects our anticipated progress at this stage of 2018 and our full year outlook of strong constant currency revenue and profit growth remains unchanged.”
David Madden, at CMC Markets said: “The expansion by Weir highlights its confidence in ESCO’s business, and the boost to earnings should be seen by the third-quarter.”
Shares closed up 132p at 2,250p.
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