Dowlais shares surge after agreeing £1.16bn takeover by American Axle
By Frank Prenesti
Date: Wednesday 29 Jan 2025
(Sharecast News) - Shares in specialist UK auto parts engineer Dowlais surged on Wednesday after it agreed terms on a £1.16bn cash and share takeover by American Axle & Manufacturing.
If the deal goes through, Dowlais would leave the London Stock Exchange after the takeover, while chief executive Liam Butterworth would also depart.
AAM is offering 0.0863 new AAM shares plus 42p a share in cash and a further 2.8 pence in the form of a final cash dividend to be paid on completion, valuing Dowlais at 85.2p a share, a premium of 25% on Tuesday's closing price. The stock was up 10% in early London trade.
Both companies said they had identified $300m in "cost synergies" across the combined group, but did not specify how many jobs could potentially be lost. They added that the merger would allow them to survive the transition from petrol and diesel to electric cars.
Immediately following completion, it is expected that Dowlais shareholders will own approximately 49% of the new group and AAM Shareholders 51%.
Formerly engineering outfit GKN's powder metallurgy businesses, Dowlais - named after the village in South Wales where GKN was founded - was spun off in 2023, while the former parent itself was bought by Melrose industries in 2018.
"American Axle & Manufacturing's merger proposal has come out of the blue as Dowlais hadn't put itself up for sale. However, consolidation is inevitable when an industry goes into a downturn as operators look to combine forces, achieve economies of scale and be in a stronger position to grab opportunities when market conditions pick up," said AJ Bell investment director Russ Mould.
"This is far from a done deal and there is a real chance that Dowlais shareholders push back for a better offer. The fact the shares only traded at 73.8p versus an implied 85.2p takeout price suggests the market doesn't believe the deal will succeed in its current form."
Mould called the 25% premium "very skinny", adding that AJ Bell calculated the average bid premium for UK-listed stocks at 47% in 2024 and 52% in 2023.
"AAM's offer values Dowlais at 4.1 times EV/EBITDA which is bargain basement territory, essentially valuing Dowlais as if it had failed its MOT and was on the verge of being put on the scrap heap."
"There is also the fact AAM's offer is structured in cash and shares. Investors typically prefer hard cash in their pocket. The biggest shareholders are asset managers Fidelity, Select Equity, T. Rowe Price, Capital Research Global Investors and Aberforth Partners. They're looking to make the strongest returns on their investment as possible and won't be pushovers."
Reporting by Frank Prenesti for Sharecast.com
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