The prospect of a bid battle powered Invensys (ISYS.L) shares to a ten-year high on Friday, after the British engineer said it had received a 3.3 billion pound ($5 billion) takeover proposal from France's Schneider Electric (SCHN.PA).
Invensys said Schneider, which confirmed only that it had made a proposal, was considering an offer of 505 pence a share in cash and stock, 15 percent above Invensys' closing price on Thursday.
A deal would allow Schneider to tap the British firm's strength in industrial automation, which is enjoying rapid growth in the oil, gas, petrochemicals and utilities sectors.
However, Invensys shares jumped as high as 513.5 pence on speculation the proposal could flush out other bidders. U.S. group Emerson Electric (EMR.N) was in talks to buy Invensys a year ago, while a report in May 2012 said Germany's Siemens (SIEGn.DE), Switzerland's ABB (ABBN.VX) and U.S. giant General Electric (GE.N) had also made informal contact.
Those companies either declined to comment, or could not immediately be reached for comment. "The most obvious candidate is Emerson, which was in related talks with Invensys back in June 2012," Societe Generale analysts said.
If a bid battle for Invensys breaks out, the share price could go even higher, said Neil Veitch, a fund manager at SVM Asset Management, which holds Invensys stock. However, a banker active in the sector said Schneider would be tough to beat. "You need to find someone willing to table an all cash bid," the banker said.
Invensys said it was likely to recommend an offer at 505 pence a share. "Schneider is finishing its due diligence. There is a deal, there is a handshake," a source familiar with the matter said, speaking on condition of anonymity. He said he expected Emerson to look at Invensys because there were few companies like it available to buy. But Emerson could be put off by the price.
don't think there is anyone else out there," he said.
LONG SEEN AS A TARGET
Morgan Stanley analysts said the price proposed by Schneider was "fair and reasonable", valuing the British company at around 22 times earnings forecasts for 2014. That compares with an average multiple of 13 times for Britain's industrial machinery and equipment sector, according to Thomson Reuters data.
They said a deal would boost Schneider's share of the industrial automation market from just over 4 percent to around 6-7 percent, compared with world No.1 Siemens' 21 percent.
Analysts said a deal would also create an opportunity for Schneider to sell its energy management products to Invensys' customers in the oil, gas and petrochemicals sectors.
At 1503 GMT, Invensys shares were up 15.4 percent at 508 pence. Schneider's were down 3.9 percent at 55.81 euros on concerns it could get sucked into a bid battle and the cost of insuring its debt against default jumped on expectations it would raise new debt to fund a deal.
Invensys has long been mooted as a takeover target in an industry dominated by larger rivals, particularly after the disposal of its rail unit last year, which enabled it to strengthen its balance sheet and pension fund.
The British firm said Schneider's takeover proposal comprised 319 pence in cash and 186 pence in new shares for each Invensys share.
The French group, which said last summer it planned to step up acquisitions, has until August 8 to say whether it intends to make a firm offer or walk away under UK takeover rules. Activist investor ValueAct Capital Management has been building up a stake in Invensys. It holds 8.16 percent of the stock, according to Thomson Reuters data. Barclays and JP Morgan Cazenove are advising Invensys, while Deutsche Bank and BofA Merrill Lynch are working for Schneider.
($1 = 0.6615 British pounds)
($1 = 0.7668 euros)