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Capital Markets

Investors have abandoned Invensys too soon

www.breakingviews.com

Investors might have thrown in the towel too soon on Invensys. Six months ago the UK engineering group was rescued with a jumbo financing package. Deutsche Bank refinanced about £2 billion of the company's debt at longer maturities, encouraging shareholders to buy £470 million-worth ($864 million) of new shares priced at 21.5p each. But the stock price struggled after the share sale, falling first to 15p and more recently as low as 11p on massive trading volumes.

Even including Invensys's substantial debts, this plunge represents a big reassessment of what the group is worth. Adding year-end forecasts for Invensys's net debt and pension liabilities to its market capitalization produces an enterprise value of just under £1.5 billion. That marks a near 20% fall from the rights-issue level. What got shareholders so worried? A rerun of old problems?

Part of the answer is that investors have cooled on engineering stocks exposed to the US economy. Invensys generates about half its revenue on that side of the Atlantic.

But that's not the whole story. More important, investors got the jitters after Invensys reported results for the last quarter. Its APV business, which makes process automation equipment for the food and dairy industries, slipped into loss, taking a charge to reflect historical accounting problems in France, and reported a slowing order book.

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