Italians Bet Billions on America's Thirst for Cable

(Bloomberg Gadfly) -- If humanity is to avoid environmental catastrophe this century, we're going to have to cut carbon dioxide emissions in a big way. Yet the renewable energy revolution will only be successful if we can connect wind farms and solar panels to where electricity is consumed.

Essential matters like these help explain why Italy's Prysmian SpA has agreed to pay a whopping 80 per cent premium to the undisturbed price for U.S. peer General Cable Corp. 

For Prysmian, the deal will build its exposure to North America, where the overhaul of the electricity network has proceeded more slowly than in Europe.

Doubtless it would have preferred to pay rather less for General Cable, which has been unprofitable (on a net income basis) for four years. Including debt and other liabilities, the deal values the target at a punchy 13.5 times trailing Ebitda.

Unfortunately for Prysmian, it wasn't the only one that spied value here. Four groups were involved in bidding, including a Chinese company, pushing up the price.

Still, Prysmian has a decent M&A track record, including the 1.2 billion-euro acquisition of Draka Holding BV. Providing it delivers a promised 150 million euros ($180 million) in annual savings, its shareholders shouldn't feel too short-changed.

But why the interest in wire and cables? For starters, the switch from centralized, carbon-intensive power production to a more distributed, low-carbon system will need lots of new high-voltage grid connections -- offshore wind farms tend to be far away from cities.

Similarly, if our telecoms are going to manage countless hours of Netflix, we'll require more fiber-optic cables too.

But financial returns from cables haven't been impressive. The cable industry is fragmented: Prysmian is market leader but with a 6 percent market share. Competition is tough because some products are built to common specification and are interchangeable. Plus, technological change is a threat as well as opportunity. Fiber-optic cables may erode demand for traditional copper transmission.

Prysmian isn't buying General Cable for its recent record. The U.S. company's sales have declined since 2013. It's pretty leveraged, doesn't generate much cash and last year agreed to pay more than $80 million in fines to settle probes related to foreign corruption and accounting issues. 

But it has attractions besides exposure to North America. Cable companies are big buyers of aluminium and copper so there should be opportunity to cut purchasing costs. While General Cable has done plenty of restructuring, Prysmian could reduce a merged entity's production footprint.

It will also try to refinance General Cable's debt and boost cash flow from working capital. Italian companies often don't pay bills quickly. That extra cash will help cut net leverage from an elevated 2.9 times Ebitda after closing, it says.

Even if you assume General Cable's earnings remain depressed, the savings should let Prysmian make a return on investment well above its roughly 7.5 percent cost of capital.

Following a bruising weekend of negotiations, Prysmian hasn't landed a bargain but investors have done okay by trusting its past promises. The shares have doubled in five years. There's no real need to cut the cable now.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

1. Partly due to asset sales.

2. It anticipates up to million euros of finance cost savings, in addition to the million euros of operational synergies

3. I've assumed the U.S. corporate tax rate falls to percent. I've taken a Kepler estimate for Prysmian's weighted average cost of capital. Prysmian is considering raising million of equity to help cut leverage after the deal and fund other potential deals. 

To contact the author of this story: Chris Bryant in Berlin at cbryant32@bloomberg.net.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.

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