The economic patriotism recently displayed by politicians in France and Spain who have circled the wagons to protect their native electricity companies from overseas takeovers was notable by its absence.Glass-maker Pilkington agreed to end 180 years as an independent company after its board urged shareholders to accept a £2.2 billion takeover offer from its biggest investor, Tokyo-based Nippon Sheet Glass (NSG).Directors of Pilkington, which has a 15-20% share of the global glass market, recommended NSGs 165p-a-share offer having spurned two lower proposals from the ambitious Japanese company in the past three months.
The board said the markets in which the company operates are challenging and volatile. Against this background, NSGs cash offer provides certainty to Pilkington shareholders, at a level which represents fair value for the business.
Rachael Waring, a Liverpool-based analyst with Numis Securities, who follows the glass-making sector and was raised in Pilkingtons home town of St Helens, near Liverpool, was not surprised at the lack of a patriotic backlash.
Pilkington has only grown its profits in recent years by taking costs out of the business. It is nothing like the size it used to be in the northwest and it moved a lot of its activities to Europe, said Waring. There have been rumours of a bid for so long that theres a degree of relief it has actually happened. Shareholders are very pleased with the price.
Nippons desire to acquire the 80% of Pilkington it did not already own first became apparent on Merger Monday October 31 last year, when O2, Mowle and P&O also received bids.
While a minority of commentators have questioned whether the loss of so many iconic British plcs is healthy for the UK economy, most investors have been delighted to see the value of their shares enhanced. Investors have welcomed the fact that the UK is one of the worlds most open economies.
The situation is in marked contrast to 20 years ago when Pilkington fended off a move by industrial giant BTR, which now trades as Invensys. At the time Pilkington marshalled employee, community, City and political opinion to back its fight to remain independent and BTR scrapped its bid after a nine-week battle.
With manufacturing sites in 24 countries and sales in over 130 countries, Pilkington is recognised as one of the worlds most technologically-advanced glass makers. The firm, founded as St Helens Crown Glass in 1826, spends £29 million a year on R&D. It invented float glass manufacturing in 1959 and self-cleaning glass in 2001. It also supplied the glass for Berlins new Reichstag building and the European Court of Human Rights in Strasbourg.
But since the mid-1990s, Pilkington has been cost cutting, reducing its workforce by a third to 24,000. This is likely to make it difficult for NSG to extract significant cost savings, suggesting it is buying Pilkington as a means of securing access to global markets, said Waring.
The enlarged group will be particularly strong in the automotive sector, as well as supplying glass to the construction industry. This is an attempt by NSG to smooth out the business cycle so they are less dependent on supplying glass to liquid crystal displays, said HSBC analyst Michael Newman.
Yozo Izuhara, NSGs chairman and chief executive believes the tie-up will transform the glass industry. The combination will create a single global player with market-leading positions across developed and emerging markets.
He said NSG is not considering job cuts and that the merged entitys European operations will still be run from the UK. The jobs of 87 people employed by Pilkington making insulated glazing units and toughened safety glass in Cumbernauld are understood to be safe. In February 2005 this plant secured a £750,000 Regional Selective Assistance grant from the Scottish Executive. Pilkingtons other former Scottish site, previously the optronics group Barr & Stroud, was sold off to Frances Thomson-CSF (now Thales) in 1998.
Pilkingtons CEO Stuart Chambers, who intends to remain with the group, said: Over the past nine years Pilkington has become leaner and more profitable ... The combination with Nippon will expand our geographic reach and enhance Pilkingtons position .
The two companies first formed an alliance in 2000, when NSG took a 10% stake in the UK firm as part of a bid to become a global leader in the glass industry and challenge its bigger Japanese rival, Asahi. NSG went on to acquire a further 10% stake the following year.
The main risk for NSG is that it may have over-extended financially to acquire a company that is twice its size. It will take on borrowings of £1.55bn to fund the deal, as well as issuing convertible bonds that will significantly dilute existing shareholders equity. Credit Suisse analyst Shinya Yamada said: NSG will have to raise money much larger than its market cap to finance the deal and, if you think about that, what they are doing is reckless.
The deal has yet to be approved by Pilkington shareholders, but is expected to be completed by June 30.