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UPDATE 2-Finland's Valmet sales decline sends shares lower, repeats Neles interest

(Adds CEO, analyst comments, Alfa Laval statement, shares)

Oct 27 (Reuters) - Finnish engineering firm Valmet posted a sharp drop in sales on Tuesday, helping send its shares to their lowest in five months even as earnings beat market expectations.

The group, which supplies technologies, automation systems and services for the pulp, paper and energy industries, said orders in the quarter dropped 34% from a year ago to the lowest level in more than four years.

Valmet also repeated its call for a merger with valves maker Neles in which it bought nearly 30% stake during the quarter for 453 million euros ($535 million), saying a deal with Valmet would create more long-term value than a bid from Sweden’s Alfa Laval which has the support of the Neles board.

Valmet again declined to specify terms for a merger but CEO Pasi Laine repeated has backing from a deal which the Neles board turned down earlier this month.

“We see that the combination would create excellent long-term value to the shareholders of both companies,” Laine said.

“It has excellent industrial logic and would form a strong platform for further business growth especially in automation systems and valves.”

Laine said Valmet had made the approach without making a specific counterbid to Alfa Laval’s 11.50 euros per share offer to avoid getting into a bidding war. However he did not say how he would further pursue his merger proposal.

Valmet’s quarterly earnings per share rose 12% from a year ago to 0.38 euros, above the average 0.33 euros expected by analysts in a Refinitiv Eikon poll.

However its shares fell more than 2% to their lowest since May after the sales decline, marked by lower service orders.

“There was some disappointment in the service orders, but I do not think this is anything worrying. The weakness was caused by COVID-19 related issues and lower capacity utilization in graphical paper mills,” said Anssi Raussi, analyst at OP.

Separately, Alfa Laval said on Tuesday it had gained all needed regulatory approvals for the takeover of Neles.

$1 = 0.8461 euros Reporting by Tarmo Virki in Tallinn Additional reporting by Boleslaw Lasocki in Gdansk Editing by Kirsten Donovan and David Holmes

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