United Dominion: Once a Takeover Target, Now Shunned


By Gene Marcial Shares of United Dominion Industries (UDI) rocketed nearly 30%, to more than 24 on Sept. 26, when the industrial conglomerate announced that it was in talks with several groups about possibly selling the company. United's stock traded on volume of 1.7 million shares -- more than 60 times its daily trading average during a three-month period.

Then what happened? The buyout talks fell apart in mid-December -- and the stock swiftly plunged to 11, where it languished for a while. In recent weeks, it has started creeping up, and it now trades at 15.

With the share price so low, has United become a value play, if not a takeover target again? The stock is trading at 6.7 times estimated 2001 earnings of $2.25 a share. And some people would expect that new suitors -- or even the previously interested parties -- would come knocking at United's door.

STICKING POINT. They haven't, however, and if you're banking on another takeover play, you're apt to be disappointed. The parties that were previously interested in acquiring United included buyout outfit Clayton Dubilier & Rice; investment firm Donaldson Lufkin Jenrette; Terex (TEX), a Big Board-listed diversified global manufacturer of heavy-duty trucks and high-capacity mining vehicles; and SPX (SPW), a Big Board-listed provider of technical products and systems.

Analysts say price was behind the collapse of the takeover talks. "Apparently the parties involved could not agree on the purchase price," says Eli Lustgarten, analyst at H.C. Wainright, who rates the stock a strong buy, in part because of its depressed price. The key to the stock now, he says, shifts back to the fundamentals -- sales, earnings, and accretive acquisitions. And back to the company's earlier plan -- laid out even before the buyout talks began -- of selling certain assets. He thinks that on fundamentals, United is worth 25 to 30 a share.

But even Lustgarten thinks a buyout in the near future isn't likely. He says as the economy improves and the company's sales and earnings start turning up again, a buyer or buyers might emerge once more.

ASBESTOS OVERHANG. Still, some players involved in the earlier talks think a buyout play is out of the question. The reason, asserts one of the principals, is that the company has serious asbestos lawsuits that discouraged some of the potential buyers after conducting due diligence on United.

One investment banker involved told BusinessWeek Online that when one of the suitors discovered the pending asbestos claims, it withdrew its bid of 25 to 26 a share and wanted to renegotiate toward a much lower price. The company, says the banker, refused, and the discussions broke off.

United spokeswoman Nancy Spurlock says the company has "sufficient insurance" to cover any potential asbestos liabilities. She couldn't say how much the asbestos claims amounted to nor how may lawsuits were pending against the company.

One banker involved says after the stock price had collapsed to 11, a United official wanted to renew talks. However, says this source, the suitors refused to renegotiate.

DOWNGRADED RATING. United is in four basic businesses: Flow technology, machinery, specialty engineered products, and test instrumentation. Some of its products include pumps, valves, agricultural equipment, and diagnostic tools. It had revenues of $2.1 billion in 2000, a current market cap of $870 million, and long-term debt of $695 million.

In December, the credit-rating agency Fitch lowered its rating on United's senior notes to BBB from BBB+. The downgrade reflects the deterioration in the company's credit profile, according to Fitch, due to fundamental operating weakness. Despite continued restructuring programs focused on margin improvement, says Fitch, operating margins have remained subpar.

United has targeted to sell five divisions with combined sales of about $335 million and earings (before, interest, taxes, depreciation, and amortization) of $35 million. United earned $2.41 a share from operations in 2000, flat with 1999 earnings.

CEO SEARCH. H.C. Wainright's Lustgarten has reduced his 2001 estimates to $2.25 a share from an earlier $2.45 because of the unexpected weaker start of the year, a result of the economy's slowdown. His preliminary 2002 projection is $2.65 -- assuming economic growth, improving energy-petrochemical demand, and sales growth overseas.

The company is currently in the process of searching fo a new CEO to replace William Holland, who retired in December after 27 years with the company, including the last 14 as CEO. Meanwhile, investors are far from united in pushing up United's stock. It's on the ropes and may well be for a while. Marcial is BusinessWeek's Inside Wall Street columnist


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