The Deal: Sumitomo Pays $1.2 Billion for Edgen Group

Tickers in this article: EDG SMFG

NEW YORK (TheStreet) - Japanese trading giant Sumitomo Corp. and its unit Sumitomo Corp. of America Inc. said Tuesday, Oct. 1, they agreed to buy steel pipe and valve distributor Edgen Group Inc. for $1.2 billion, picking up a company whose stock has been lagging since its initial public offering last year.

Sumitomo is offering $12 per share in cash, or about $520 million, for Edgen, a 58% premium over its closing price Monday of $7.60. Sumitomo expects to close the deal by the end of the year if it clears regulators. The breakup fee is $20 million.

While the announcement of the deal listed only the per share price, industry sources confirmed that, with debt, the value reached $1.2 billion.

At one time controlled by a group of investors led by Jefferies Capital Partners Inc., Edgen went public in April of last year at $11 per share, below its expected range of $14 to $16. Its shares dropped 13.6% on their first day of trading and have languished mostly below $9 per share ever since.

Its earnings also have been soft, with the last three quarters coming in below analyst expectations. Analysts also have thought its balance sheet has been weak, with around $680 million in debt.

"The key for stock to work is Ebitda guidance being achievable and free cash generation/balance sheet improvement," analysts at Tudor, Pickering, Holt & Co. wrote in a report this past March.

Kazuhiro Takeuchi, president and CEO of Sumitomo Corp. of America and Sumitomo Corp.'s general manager for the Americas, said in a statement the investment represents further expansion of Sumitomo's distribution presence across the upstream, midstream and downstream oil and gas markets and related segments and will complement its integrated supply solutions to the energy market.

"With the acquisition of Edgen Group, we gain a global distribution platform, including experienced staff, facilities and an expanded specialized steel product offering that will allow us to continue our growth and support the development of global energy infrastructure," he said. "As a leader in the supply of steel products, we continue to build a robust value chain from manufacturing through distribution and related services to support our customer's requirements."