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Terex Scraps Konecranes Merger; Stock up on MHPS Sale

Shares of Terex Corporation TEX soared 10% after the company announced that it has scrapped a nine-month old merger deal with Konecranes and has instead agreed to sell its Material Handling and Port Solutions (MHPS) business to the Finnish company for $1.3 billion. Meanwhile, Terex will continue to pursue discussions regarding its acquisition bid by China-based Zoomlion. A full takeover (including the MHPS segment) of Terex by Zoomlion would need to be agreed by end of May. In case the takeover finally happens, Terex would have to pay a modest break fee of $37 million to Konecranes.

The Initial Deal

In Aug 2015, Terex and Konecranes announced plans to merge the two companies. The transaction would have created a global leader in lifting and material handling solutions with expected pro forma 2014 revenues of $10 billion. It would have augmented Terex’s footprint in key sectors, offering greater opportunity to capitalize on growth trends in the port and industrial sectors, and services. The new company would also have had a more robust portfolio of complementary products and customer solutions.

Zoomlion’s Offer Complicates Matters

The merger deal between Terex and Konecranes was jeopardized in Jan 2016, when rival company, Zoomlion made an all-cash offer to buy Terex. Although Zoomlion’s first bid of $30 per share was rebuffed by Terex, in Mar 2016, the former raised its bid to $31 a share, which is currently under consideration.

Why MHPS?

The MHPS segment, which contributes approximately 22% to Terex’s total sales, is involved in the design, manufacturing and marketing of industrial cranes, including standard cranes, process cranes, rope and chain hoists, electric motors, light crane systems and crane components and port equipment.

The segment is exposed to choppy equipment sales and has suffered operating losses in five out of the past six years. In 2015, the segment’s sales tanked 19% to $1.4 billion with the segment reporting a loss of $8.6 million. In the first quarter of 2016, the segment recorded an 8% year-over-year drop in revenues to $318 million. The segment incurred a loss of $61.8 million during the quarter, significantly wider than the year-ago loss of $4.4 million.

Financial & Other Benefits of the MHPS Sale

Terex will receive $820 million in cash and 19.6 million newly issued shares of Konecranes. Upon completion of the transaction, Terex will own approximately 25% of the outstanding shares of Konecranes and will be able to nominate two directors. The transaction, subject to customary regulatory approvals and approval by Konecranes shareholders, is expected to close in Jan 2017.

Even though the Konecranes deal would have allowed Terex to reduce its U.S. tax liabilities by redomiciling to Finland, sale of the underperforming MHPS segment will remove a major drag from the company’s business.

The sale is expected to be accretive to Terex earnings. It will significantly reduce debt levels, improve balance sheet and gives longer-term financial flexibility to invest in business and buy back shares. Moreover, as a 25% shareholder of Konecranes, Terex will be able to share dividends, synergies and economic upside of the combined business.

Terex currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industrial products sector include General Cable Corporation BGC, SPX FLOW, Inc. FLOW and Gorman-Rupp Co. GRC. All three stocks sport a Zacks Rank #1 (Strong Buy).

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