Now that Warren Buffett has taken over Iscar Ltd., will he look for another company in the metalworking tool industry in order to challenge Sweden’s Sandvik AB (SAX:SAND; LSE:SDF) for the position of industry leader? Goldman Sachs thinks so.
In a survey on Sandvik published yesterday in the wake of the Iscar deal, Goldman Sachs reveals the market shares of companies in the industry. Sandvik’s metalcutting division has a 22% market share, compared with third-ranking Iscar’s 9%. Kennametal Inc. (NYSE:KMT) is in second place with an 11% market share.
Goldman Sachs believes that Berkshire Hathaway Inc.’s (NYSE:BRK.A; BRK.B) takeover of Iscar is good news for Sandvik. “We are encouraged by Buffett's allocation of capital to this particular industry at this particular time and believe that it represents a positive read for the sector and Sandvik. We have spoken to both Sandvik and Kennametal management about this acquisition and both parties were as surprised as we were to see the announcement.”
In its report, Goldman Sachs quotes comments by Iscar president Jacob Harpaz to “Globes” earlier this week. Harpaz told “Globes” that Buffett “has big plans for Iscar”, and that he was prepared to increase spending and make acquisitions. Harpaz quoted Buffett as saying, “If you want to become number one, I’m prepared to back you, even if it means a large acquisition.”
Goldman Sachs believes that, if this is the case, an acquisition by Iscar is only a matter of time. “We believe that a Sandvik/Iscar combination would be too large and would be blocked on competition grounds. We believe a merger of Iscar and Kennametal, on the other hand, could be a possibility. However, although the combined entity would still be slightly smaller than Sandvik Tooling we do not believe that clearance from the anti-trust authorities would be automatic. Beyond that any sizeable acquisition would require a deal with one of the Japanese players.”
Kennametal has a market cap of $2.6 billion. Goldman Sachs believes that Iscar has the highest profit margins in the industry. According to Goldman Sachs, Iscar earning before interest and taxes (EBIT) is 35%, compared with 10-22% for its competitors.
Published by Globes [online], Israel business news - www.globes.co.il - on May 10, 2006
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