Valmet's minority share acquisition of future Neles raised questions from analysts and institutional investors

Yesterday June 17^th Valmet informed that it has agreed to acquire 22.4 million shares in the future Neles Corporation from Solidium, representing 14.88% of all Neles’ shares and votes. The transaction between Valmet and Solidium is expected to take place on July 1, 2020. The agreed purchase price is EUR 8.00 per share, corresponding to a total transaction value of EUR 179 million at the signing, paid 100% in cash.

Valmet arranged a conference call for analysts, investors and media to discuss the share acquisition’s strategic rationale. Valmet had also a lot of discussion with analyst outside the conference call yesterday. Let’s have a look at the most common questions raised and the answers given.

Q: Why did Valmet acquire 14.9% of Neles?

A: Neles is a good quality global company with a large share of recurring business and a strong position in the pulp and paper industry. It has demonstrated good growth and has potential to grow further. We have agreed to acquire a minority share in Neles and our target is to increase our ownership when Neles’ share price supports further acquisitions. Valmet’s goal is to have an active long-term role in the development of Neles.  The strategic rationale of the share acquisition is further supported by the fact that Valmet and Neles have a common heritage, serve similar global industries and benefit from same global megatrends such as the need to improve resource efficiency and reduce emissions, digitalization and automatization as well as urbanization and increasing living standards.

Q: What are Neles’ growth prospects in the future?
A: Neles has a strong track record with orders received having grown by approximately 5% annually since 2011 and the profitability has improved. Since 2016 Neles has grown faster than its industry, and it has potential to grow further.   

Q: Why Valmet did not get Automation and Neles already in the demerger in 2013?
A: In 2013 Metso’s strategy was to develop the automation business and flow control business. However, the strategy has changed after that.

Q: Why would Valmet be a better owner of Neles than Metso?
A: Around 26% of Neles’ sales is from pulp & paper industry. This is a larger share of shared business compared to Metso Minerals and Neles.

Q: Is Valmet a big customer for Neles? Are valves critical components in Valmet’s machines?
A: Valmet is not a major customer for Neles. Valves are critical part of both pulp and paper mills, but typically customer buys valves directly from Neles.

Q: Big part of Neles’ business is oil and gas. How does this link to Valmet and Valmet’s sustainable business?
A: Sustainability is part of Neles’ strategy and integrated throughout its value chain. Neles’ valves ensure safe operations in customers’ plants and mills.

Q: 70% of Neles business is not related to Pulp and Paper. How are these businesses related to Valmet’s strategy?
A: Pulp & paper is Neles’ core business. Neles’ customer base shares similarities with Valmet’s automation

Q: Does Valmet plan to acquire also the remaining part of Neles shares?
A: We have agreed to acquire a minority share in Neles and our target is to increase our ownership when Neles’ share price supports additional purchases. Valmet’s goal is to have an active long-term role in the development of Neles

Q: What price is Valmet willing to pay for Neles shares in the future?
A: Valmet will only purchase shares at a price that will support long-term shareholder value for Valmet’s shareholders.

Q: How will Neles be treated in Valmet’s financial reporting?
A: This depends on how Valmet’s ownership in the future Neles develops and if we would at some point get a seat in Neles’ BoD. One option is that we would treat Neles as an associated company with equity method in Valmet’s financial reporting. This would mean that Valmet’s share of Neles’ net profit would be included in Valmet’s Comparable EBITA. However, it is also possible that Valmet’s investment in Neles will be measured at fair value through other comprehensive income, meaning that it would not impact Valmet’s Comparable EBITA.

Q: How does Neles fit into Valmet’s mission of converting renewable resources into sustainable results?
A: Approximately 30% of Neles’ sales are from the pulp & paper industry and therefore fit our mission well. Furthermore, Neles’s strategy is to be a reliable partner offering sustainable solutions for its customer industries by helping to ensure the safe flow of materials. Neles achieves this through constant development of product quality, material efficiency and operations. As part of its strategy, Neles continues to integrate sustainability throughout the value chain.

Q: In addition to the EUR 8.00 per share purchase price, were there other terms in the transaction?
A: Yes. The price will be adjusted based on Neles’ share price development during certain limited time period after the completion of the partial demerger of Metso. The possible adjustment is paid or received by Valmet in cash. The adjustment agreed is customary and capped, and will not have a material impact on the transaction value. The agreement includes a one-year lock-up period, during which Valmet may not dispose its shares in Neles without Solidium’s approval. Solidium retains the right of first refusal for a period of three years after the closing. In addition, the agreement includes an anti-embarrassment clause, according to which Solidium could be entitled to an additional cash payment in certain circumstances where Valmet would acquire or dispose shares in Neles at a higher price during a three year period after the closing.

Q: Why did the agreement include terms such as 1 year lock up and anti-embarrassment?
A: A contract is always a result of negotiations. We think that the terms were good and acceptable. Solidium wanted to ensure best possible future for Neles in the long term. Valmet wants to develop Neles in the long-term, meaning that three years is not a long time in this context.