European Debt,Currency Seen Aiding Emerson's Bid For Chloride

Europe's debt crisis and its weakening currency are likely to provide momentum for Emerson Electric Co.'s (EMR) renewed pursuit of Chloride Group PLC (CHLD.LN), analysts say.

U.K.-based Chloride, which provides backup power systems for computer-data centers, rejected Emerson's buyout attempt in 2008. But the St. Louis-based diversified industrial company has resurrected its interest in Chloride, disclosing last week that it offered to pay about $1.1 billion, or about GBP723 million, for the company.

Chloride executives dismissed the offer, which amounted to about $4.19 a share, or 275 pence, as too low. But industry analysts noted their rejection didn't rule out consideration of additional proposals. Economic and market conditions could persuade Chloride executives to take another look at a tie-up with Emerson.

With 64% of Chloride's annual revenue coming from Europe, analysts say the company is susceptible to sluggish demand for its products in the coming years. European economic growth is expected to lag other regions, including the U.S., as countries resort to tax increases and deep cuts in government spending to fight off budget deficits and escalating debt costs. While the crisis has eroded the value of the euro against other currencies, it's also making exports from European Union countries less expensive for foreign buyers. Just 16% of Chloride's revenue comes from Asia and 11% from North America and South America.

"Because Chloride is producing in Europe and the currency is weak, they could say 'let's leverage [Emerson's] distribution'" in other countries, said Ajay Kejriwal, an analyst for FBR Capital Markets & Co. "Emerson is a company that has a strong presence outside of Europe. From a business standpoint, this would be a strong marriage."

A spokesman for Chloride declined to comment on Emerson beyond its rejection of the Emerson's initial offer. Emerson isn't talking either. Chairman and Chief Executive David Farr emphatically refused to answer questions about Chloride during a conference call with Wall Street analysts Tuesday.

But Farr has spoken about the growth opportunities he sees in the company's network-power business, which primarily supplies computer-server rack components, surge-suppression gear, cooling equipment and backup power systems for data centers used by businesses, hospitals, schools and other large institutions. Network Power generated $5.4 billion of revenue for Emerson last year, or 21% of the company's $21 billion of total sales in 2009.

Emerson acquired information-technology company Avocent Corp. last year for $1.2 billion to penetrate further into the data center equipment market.

"Emerson is looking for a more complete product offering for customers," said Daniel Holland, an analyst for Morningstar Inc.

Chloride specializes in uninterruptible power systems that keep data centers powered up when electricity from utility companies is disrupted. Uninterruptible power is about a $7-billion-a-year worldwide industry, with France's Schneider Electric SA holding the largest share at 26%, followed by Ohio-based Eaton Corp. (ETN) at 12%. Emerson, in third place, has about 9% of market, while Chloride has 4%.

The uninterruptible-power sector has been steadily consolidating in the past decade, a trend that's expected to continue. Analysts say Eaton and Schneider would likely face anti-trust barriers if either pursued Chloride, leaving Emerson as the most likely suitor for the company. Chloride runs the risk of becoming a regional niche player in a consolidating business environment, if it continues to rebuff Emerson.

"If you don't have scale, you're toast," said Nicholas Heymann, an analyst for Sterne, Agee & Leach Inc. "There are a lot of strategic reasons that warrant the guys at Chloride taking a hard look at Emerson."

Ultimately, the price Emerson is willing to pay for Chloride will drive decisions by the company's directors and shareholders in the weeks ahead.

Emerson's offer last month represented a 34% increase over the price of Chloride's stock before Emerson approached Chloride. But at 275 pence a share, Emerson's offer wasn't much of an improvement over its unsuccessful bid in June 2008 of 270 pence a share. The weakening value of the U.K. pound against the U.S. dollar in recent months has given Emerson greater capacity to raise its offer. Moreover, Emerson's decision to take a second run at Chloride signals to Chloride shareholders that Emerson regards Chloride as high-value target.

"The dollar has moved in [Emerson's] favor and Chloride is seeing a decent pickup in orders," said Stephen Swanton, an analyst for UBS AG, in a recent note to investors. "It may take more than 275 pence to get a deal done."

Chloride's stock ended Thursday's trading session on the London Exchange down 1.35% at 293 pence a share. In a volatile and broadly lower session in New York, Emerson was recently trading down 1.2% at $48.42 a share.

-By Bob Tita, Dow Jones Newswires; 312-750-4129; [e-mail]