Daimler and Rolls-Royce bid for Tognum seen low

By @ibtimes on

Germany's Daimler and Britain's Rolls-Royce look set to raise their offer for Tognum after the industrial engine maker dismissed a joint 3.2 billion euro ($4.4 billion) bid as too low.

Tognum said on Wednesday there was a deal in principle but that price was a sticking point, raising expectations that the powerful industrial duo will have to improve their 24 euro-per-share cash bid.

Tognum shares jumped 7.3 percent to close at 24.90 euros, reflecting market hopes of a better offer.

If they succeed with the joint takeover, Rolls-Royce will expand its marine and diesel power business. Daimler will re-establish closer ties with a major buyer of its truck diesel engines, which are retooled by Tognum for other purposes.

The two hope to tap into a global market worth more than 30 billion euros a year that is growing at above-average rates.

However, car and truck manufacturer Daimler and engine maker Rolls-Royce clearly still have some work to do to win over Tognum's management, which holds about 10 percent of the company's stock, to agree to the offer price.

Tognum shares sold for 24 euros each in the company's initial public offering (IPO) in 2007. And although Daimler and Rolls-Royce are offering a 30 percent premium to last week's closing Tognum price, the bid offers no gain for investors or managers who have held the stock since the IPO.

Analysts at Cheuvreux recommended shareholders wait for a higher offer, and WestLB had said earlier this week it expected a bid at 25-30 euros per share.

A U.S. hedge fund manager, speaking on condition of anonymity, said Daimler and Rolls-Royce would have to sweeten their offer to win over management, adding he expects the bid to be raised to between 25.50 euros and 26.50 euros.

Daimler Chief Executive Dieter Zetsche played down any differences over price, stressing instead Tognum's overall willingness to do a deal.

It's very normal in such a transaction that you won't expect a specific endorsement by the management as far as the value is concerned, Zetsche said during a conference call.

There is no disagreement but in the whole rest of the issues we have full agreement.

Daimler is being advised on the deal by Goldman Sachs , Rolls-Royce by Rothschild and Tognum by Berenberg Bank.

DIESEL POWER

The offer is contingent on Daimler and Rolls-Royce gaining control of at least half of Tognum's equity plus one share. Daimler already holds 28.4 percent.

Daimler once owned all of Tognum but sold it to Swedish private equity group EQT for 1.6 billion euros in equity and debt in December 2005. It then bought back more than 20 percent in April 2008, the year after its former unit went public.

The combination between Tognum, Rolls-Royce and Daimler makes sense to us as the full product spectrum of diesel engines and gas turbines can be offered and global service networks can be combined, BHF Bank analyst Stefan Augustin said.

He said he expected the two companies could generate some savings in the supply chain and in logistics as well.

The real prize is all about capturing the top-line growth and i have no doubt that this joint venture will do just that, Rolls-Royce Chief Executive John Rose said.

Tognum is expected to report revenue growth of 10 percent this year and 8 percent in 2012, according to Thomson Reuters I/B/E/S estimates.

Daimler and Rolls-Royce said they plan to maintain Tognum's manufacturing sites under any deal, as part of which Rolls-Royce would contribute its Bergen marine and auxiliary-power engine business.

(Additional reporting by Philipp Halstrick and Alexander Huebner; Editing by David Holmes and Alexander Smith)

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