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Sauer-Danfoss Inc. (SHS): Industrial Giant About to Get Bigger

Sauer-Danfoss Inc. (NYSE:SHS)Danish industrial giant Danfoss A/S has issued a revamped bid for full control of Sauer-Danfoss Inc. (NYSE:SHS), the diversified machinery company in which it already owns a 75% stake. The proposed buyout offer values the entire company at nearly $3 billion and marks a significant increase from an earlier offering that would have valued the company at about $2.4 billion.

Although Sauer-Danfoss Inc. (NYSE:SHS)’s board of directors has unanimously approved the proposal and has expressed interest in pushing it through to completion by the end of the second quarter of 2013, some shareholders have expressed reservations. Accordingly, several law firms have launched legal investigations into the terms of the deal. While the outcome of these actions is unclear, they may collectively serve to delay the proposed buyout for months. At the same time, Sauer-Danfoss’s price action suggests that most investors believe the deal will go through without delay.

About Sauer-Danfoss (NYSE:SHS) and Danfoss

Ames, Iowa-based Sauer-Danfoss is a publicly traded company that is majority-owned by Danfoss A/S. It manufactures hydraulic systems, engines and electronic components for use in stationary and mobile pieces of power equipment. Many of the products that it makes and sells are controlled by advanced microprocessors and can react in real time to changing environmental conditions. Its most popular brands include TurollaOCG, HydroGear, Schwarzmuller and Comatrol. Most of its clients operate in the construction and manufacturing sectors. Sauer-Danfoss Inc. (NYSE:SHS) employs about 6,400 people and earned $181.8 million on gross 2012 revenues of $1.9 billion.

Nordberg, Denmark-based Danfoss A/S is a conglomerate that manufactures and distributes a variety of mechanical and electronic devices as well as components for a number of other manufacturers’ finished products. The company sells a full range of refrigeration and air conditioning components, including coils, compressors, condensers and valves. It also manufactures and distributes line components, temperature regulators, radiator equipment, floor heaters, flow control devices, ventilation equipment and melting systems. In addition to its heating and cooling operations, Danfoss operates motor-building and power equipment divisions that make starters, nozzles, pumps, valves and other internal-combustion equipment.

How the Deal Is Structured

Under the terms of this cash-for-stock deal, Danfoss A/S would issue cash payments of $58.50 per share to each outstanding Sauer-Danfoss shareholder as of a yet-to-be-determined record date. Regardless of when the deal officially closes, Sauer-Danfoss would provide a one-time cash dividend of 35 cents per share on March 29, 2013. Relative to Danfoss’s current share price of $58.75, the proposed deal represents a discount of about .5%. Relative to its pre-announcement share price of about $52, the proposed deal represents a premium of more than 10%.

Initially, this deal will take the form of a tender offer. At some point in March, Sauer-Danfoss shareholders will be permitted to exchange their shares for cash and relinquish their holdings in the company. If Danfoss A/S can increase its stake in Sauer-Danfoss to at least 90% of the company’s total outstanding shares, Danish law permits it to “seize” the company’s remaining shares and force holdouts to accept its cash offer. Since it is likely that there will be a few holdouts, the company expects to exercise this right. This issue might also be the reason for the aggressive legal maneuvering that followed the buyout’s announcement.

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