Intertek strategic review was 'defensive move', says Jefferies

(Sharecast News) - Jefferies said on Friday that Intertek's strategic review was likely a defensive move and it will be interesting to see if any other potential bidders emerge, either strategic or additional private equity, after it rejected a takeover proposal from Sweden's EQT. Shares in the inspection, product testing and certification company surged on Thursday after it confirmed it had rejected a 5,150p per share takeover proposal from EQT. It said the offer fundamentally undervalues the group.

Jefferies said the offer values Intertek at 19.8x FY26 estimated price-to-earnings, 12.5x EV/EBITDA, or 4.5% free cash flow yield on its estimates. This represents a 35% premium to Monday's share price but only an 18% premium to the closing price on Thursday and the average share price over the last three months.

It also said: "It is now clear that Intertek's announced strategic review was likely a defensive response to this bid and a likely tactic to help support the share price."

On Tuesday, Intertek said it was launching a strategic review to evaluate the creation of two specialist businesses, Intertek Energy & Infrastructure and Intertek Testing & Assurance, either by demerger or a sale.

On the one hand, Jefferies said it sees strategic merit in a separation, given the current potential underappreciation for the quality of the Testing & Assurance business. On the other, it said a separation into smaller assets potentially opens up the business to a bid, including that of a strategic buyer, given the BVI/SGS merger talk last year, and interest in Intertek ahead of this.

"In hindsight, we see the review as a strategic move by management to help support the share price and/or provide an opportunity for potential additional bidders to emerge," it said.

"Should a formal bid be made, the key debate for shareholders will be should they take the offer or wait to explore the potential outcome of the Strategic Review and separation for the business.

"We think any improved offer may need to be at least 5-10% higher than the rejected approach to be entertained, comfortably valuing the business at more than 20x P/E recent highs."

Jefferies said shareholders would need to decide if a sale at these levels, following a prolonged period of underperformance versus TIC peers under current management, outweighs the potential upside opportunity from further operational improvement and the potential breakup valuation opportunity and if they have the patience to wait this out.

"We see a potential range of 14-18x EV/EBITDA for the Testing and Assurance Business benchmarked against a combination of recent M&A transactions (including Eurofins E&E business sale), premium TIC multiples, and discount to US-listed UL Solutions as a consumer-heavy peer," it said.

"We use a range of 6-8x EV/EBITDA for the lower-margin, more cyclical Energy & Infra business.

"Combined this suggests a fair value of a breakup at the lower end at 4,700p and up to 6,400p at the upper end in a bull-case scenario."

Jefferies has a 'buy' rating and 4,800p price target on the stock.

At 1050 BST, Intertek shares were up 3.6% at 4,927.03p.