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ShawCor sale will draw big crowd, high price

Ewan Nicholson

Amid the takeover controversy around resource producers such as Nexen Inc. and Progress Energy Resources, one very large potential takeover of a Canadian company is ticking toward the finish line with little fanfare.

ShawCor Ltd. shares have steadily been climbing since the company announced in September that it was putting itself up for sale, as investors grow more comfortable with the possibility that a deal for the pipeline coating maker will be in the bag by year-end.

ShawCor gave the market comfort in recent weeks when it quietly answered one of the questions that a potential buyer might have about just how much the company is worth, through a purchase of the remainder of a valuable subsidiary.

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In late October, ShawCor purchased the stake in its Socotherm pipe coating subsidiary that had been held by an Argentine private equity firm. It was a small purchase, at $135-million, but analysts viewed it as a savvy move to tidy up a loose end that a buyer might want to have out of the way.

The stock has steadily climbed (with the exception of a selloff Wednesday with the broader market) since the purchase and now sits close to $45, giving the Toronto-based company a market value of $3.1-billion.

There's still significant upside possible, according to RBC analyst Dan MacDonald, who says $50 a share is attainable. With management shooting to have the deal finished by the end of the year, that's a return of better than 10 per cent in less than two months, if he is right.

The likely bidders are still thought to be large players in the infrastructure equipment space, such as General Electric Co.

The betting among some investors who hold ShawCor is still that an industry buyer is more likely than a private equity firm for a couple of reasons. For starters, a buyer like GE would have little trouble laying out a few billion in cash.

Secondly, a buyer with a presence in the industry would have potential synergies.

And thirdly, and most compellingly, an industry buyer would have a good handle on where in the cycle of pipeline construction we are. ShawCor has a very full order book, earnings that have benefited from the company being very busy, providing lots of operating leverage, and a multiple that has been priced at a top of the cycle level. In other words, those are a lot of things that could drop if the cycle turns.

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A financial buyer, and more importantly its bankers, might have a hard time reaching for top valuation in that environment. An industry buyer with strong intelligence about customers' intentions might have a better feel and a bit more confidence, as well as the ability to ride out a turn in the cycle knowing that it makes sense to own ShawCor for the long term.

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