Chemring – bid abandoned

Friday, Nov 09 2012 by

Bloomberg news reported that Carlyle Group walked away from a potential bid for CHG (Chemring). Negotiations had been extended twice, and there were two downgrades by Chemring.

Chemring said today after Carlyle pulled out that it will continue to feel the strain from governments cutting defense budgets. “Carlyle realized Chemring’s problems were far deeper than expected,” Oliver Sleath, a London-based analyst at Credit Suisse, said in a telephone interview. Another bidder is not likely to emerge in the short term, he said.

The CEO had resigned a few weeks ago due to its latest profit warning.

CHG closed at 258p -12.90 (-4.8%). Ouch.

I note that there was an article on Stockopedia suggesting it as a value idea. In my view, it was an extremely dangerous tactic to buy whilst there was a potential bid. It is so incredibly easy to come unstuck by buying on bid speculation. It’s true that if there was a bid, shareholders would likely have done well. But there’s always a non-trivial risk of something going wrong. That, alas, is what happened. Simple moral: don’t buy on bid talk. That way you don’t have to see a significant percentage of your holding go up in smoke.

In his “Genius” book, Greenblatt lists risk/merger arbitrage in the chapter “Don’t try this at home” – which, as the title states, is an area to avoid. He gives a couple of case studies. Florida Cypress Gardens is the first example. A bid was announced, approved by the shareholders, and it looked almost certain the deal would go through. Before the deal closed, Gardens fell into a sinkhole, which scuppered it. Another case was Combined International, where a controlling shareholder got cold feet even at the meeting where the deal was to be ratified. Even during “done deals” – for which CHG falls far short – there is enough that can go wrong.

Should be interesting to see how this plays out. The analyst’s comments sound rather ominous to me, and my hunch (and Iet’s face it, it’s only a hunch) is that we haven’t seen the bottom of this, in multiple senses of the word. In my inexperienced and simplistic view, this one is going to be very tricksy and dangerous, despite the seeming attractive PE of 5.

We shall see.

Happy investing to you all.

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Chemring Group PLC is engaged in offering solutions to protect defense and security markets. The Company operates through three segments: Countermeasures, which is engaged in the development and manufacture of expendable countermeasures for air, sea and land platforms, and land-based electronic warfare equipment; Sensors & Electronics, which is engaged in the development and manufacture of improvised explosive device (IED) detection equipment, chemical and biological threat detection equipment, IED electronic countermeasures, network protection technologies and explosive ordnance disposal equipment, and Energetic Systems, which is engaged in the development, procurement and manufacture of signals and illumination devices and payloads, cartridge/propellant actuated devices, pyrotechnic devices for satellite launch and deployment, missile and ammunition components, propellants, warheads, fuses, separation sub-systems, actuators and energetic materials. more »

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1 Comment on this Article show/hide all

Miserly Investor 9th Nov '12 1 of 1

Hi Mark,

My article on Chemring (linked to above) was written from the point of view of a long term buy and hold income investor. Whether or not CHG proves to be successful in such a strategy will therefore be dependent only on whether there is progress on earnings and dividends over several years and whether the current price is an attractive entry point relative to that assumption.

The strategy has no regard for short term price volatility as there is no intention to exit in the short term. Buying due to the existence of a bid was not at all relevant to the main thesis; and consequently the withdrawal of the bid is equally of no relevance even if it means the price falls. The risk with such a strategy is not price volatility, it is whether there is business progress over a long period.

I can see how the price fall would be "dangerous" for a trader speculating his capital on a takeover and looking for a quick exit, but the real danger for me is a dividend cut which is why the article focused more on dividend growth history, cover and cash flow.

I think CHG will be a very interesting story to watch unfold!


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About Mark Carter

Mark Carter

I am a private investor living in Scotland. I am a computer programmer by trade.


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