Martin Flanagan: Exova rides out oil downturn into a merger


It’s always a little sad when a well-run, independent Scottish company succumbs to a takeover bid, even when it is amicable as the acquisition of industrial materials testing group, Exova, which is being snapped up by Element Materials Technology.

Exova, headquartered in Edinburgh, has an enviable client list, including big names such as Boeing and Ford. Under chief executive Ian El-Mokadem, the group has made a decent fist out of managing the downturn in the oil and gas industry in a time of declining energy prices and pulled projects in the North Sea and elsewhere.

The fact that Exova had two other bid approaches to consider shows how highly regarded it is in the sector

• READ MORE: Edinburgh testing group Exova agrees to £620m takeover

Oil and gas is now about 9 per cent of group revenues, about half what it was at the time of Exova’s flotation three years ago. The group has navigated those difficult energy waters through a mixture of organic growth and acquisitions, and Element Materials Technology obviously sees in the Scottish business a way to enhance its own footprint globally in testing for the aerospace, energy, transport and industrials segments.

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There is good geographical complementarity, with Element stronger in North America and Exova in the Middle East and Asia. It also broadens the suitor’s exposure to include fire, health sciences and infrastructure, and calibration.

As such, this merger does not seem one dictated by financial engineering and synergistic savings, rather leveraging on each other’s strengths.

Both businesses are in decent nick, and the price being offered – 26 per cent above Exova’s average share price over the past 12 months – makes clear it is not a rescue takeover.

• READ MORE: The Edinburgh group testing products around the globe

The fact that Exova had two other bid approaches to consider, the revelation sending its share price soaring a few weeks back, shows how highly regarded it is in the sector. It has speciality and industry expertise at a time when many conventional bulk commodity businesses are feeling the strain from macro-economic headwinds.

In short, the deal looks one of industrial and commercial logic, at a fair price, for a company that, while doing decently as a standalone company, will have stronger wind in its sails as part of a bigger combination.

It isn’t the first Scottish business to be in this position, and it won’t be the last.

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