Second time unlucky for Siddons?

We last reviewed Siddons in issue 41, not long before this second bid (when the price was $5.10) with an accumulate/buy below $4.70 recommendation. The company - an old-style industrial that manufactures and distributes fasteners, welding equipment, boilers, hardware and tools - has had several years of flat profit growth due to import competition and an inability to raise prices. Obviously ITW thinks it can do better.

Questionable decisions

Last time ITW bid for the company Siddons was able to fight it off - performance was good and getting better. This time, it doesn't have that luxury. While profits should improve from here, the market is demanding better. John White, the new MD appointed in October, has stated the company needs to grow by acquisition to achieve targeted sales of $1bn. To help it along Siddons secretly purchased 4% of gardening and fertiliser group, Arthur Yates. Yates' own performance has been somewhat lacklustre so it promptly announced the stake to the market in the hope of boosting its share price through takeover speculation.

Such superficial manoeuvres benefit no one - it's no longer sufficient for a company to grow sales for the sake of it - shareholder value and EPS growth are the buzzwords these days. The company has stated Yates 'may synergistically fit with Siddons Ramset's distribution strategy', but it's hard to see how. Siddons is a wholesaler and distributor of manufactured items while Yates' produces low-value seeds and fertilisers for gardeners. Both product groups may need a warehouse and a few forklifts but there the similarities seem to end.

Takeover defence

Now to the takover offer. A sure sign the market is unimpressed with a company's performance is when the shares trade at a price below the takeover bid. Siddons had consistently traded below $5.95 since the bid was announced - until now that is. The independent expert's valuation puts Siddons value at between $6.28 and $6.98 per share.

For its part, the company has declared a special fully franked dividend of 50 cents per share in addition to the 12-cent interim dividend. And surprise surprise, up goes the share price, making our last recommendation a good deal more profitable in the process. The company has also said it will sell off smaller divisions and reinvest the funds in the fastener and hardware operations, although if this was so obvious, we wonder why it wasn't announced earlier.

What happens now? Having waited more then eight years already, ITW are unlikely to walk away a second time. The easiest thing for everyone would be to raise the bid to between $6.30 and $6.50 a share, possibly allowing shareholders to retain the special dividend (the franking credits are useless to ITW). As the bid would then be in the valuation range calculated by the independent expert, the board would have little choice but to recommend the bid. There is also the possibility of a bid by another company, although this is receding as time passes. HOLD, in the event that a higher offer is flushed out. In these situations, you never accept or sell until the last moment.