De La Rue: the money-making money maker
LONDON (MarketWatch) -- Here's a stock that even the most inflation-paranoid investor could love.
If inflation runs so high that people end up carrying their currencies around in wheelbarrows, then there would hardly be a firm better positioned to benefit than De La Rue, the world's leading manufacturer and supplier of banknote printing and banknote paper.
Of course, De La Rue isn't that bleak in its view about the global economy, and more to the point, it says that it doesn't need a worldwide spike in the money supply to prosper.
But at a time when some complain that monetary policy is too loose, it hasn't gone unnoticed that the nearly 200-year-old company offers benefits that the average U.K. midcap stock doesn't provide.
"With a long order book and ever-increasing pricing power, we believe the stock is an excellent inflation hedge and defensive play against the backdrop of a cyclically challenged support-services sector," said Ed Steele, an analyst at Citigroup.
Shatish Dasani, De La Rue's financial controller, made a similar point in an interview with MarketWatch. "It's a tough time for the U.S., the U.K. and other developed countries, but we've got a good market position, and a lot of that is in developing countries where demand is buoyant," he said.
"There're good levels of capacity utilization and the business is doing quite well," he added.
Dasani also pointed out that economic forces aren't the only drivers of the currency business.
With the proliferation of ATMs, central banks have adopted stricter standards on the types of currencies they allow in circulation, which in turn forces them to replace notes more quickly.
Central banks also have demanded tougher new security features to combat counterfeiters.
Plus, politics play a role: When regimes change, countries want to put new heads of state or central-bank governors on their notes.
"A classic example was in Iraq," Dasani said. "That was a really good order for us."
The company last week took a step to be an even purer-play inflation hedge, announcing a deal to sell its banknote-sorting business, a business that makes components for ATMs, to the Carlyle Group for 360 million pounds.
"The remaining core business of banknotes, paper and security documents is a high-quality earnings, cash-generative business with excellent prospects and considerable barriers to entry," according to Andrew Darke, an analyst at Evolution Securities.
The biggest part of the business, representing three-quarters of its business and 66% of its 753 million pounds in annual sales, is banknotes. De La Rue's few competitors include Germany's Giesecke & Devrient and France's Oberthur (FR:012413: news, chart, profile) .
With plants in the United Kingdom as well as Kenya, Malta and Sri Lanka, De La Rue actually makes the money for many countries -- the Bank of England is its most famous customer -- while providing ancillary services for others.
"It's unlikely the Fed or Russia or China will contract out," Dasani commented. "But even the Fed, we sell some security features to them."
The De La Rue executive said that the company is looking out for a plan to open up the euro-printing market in 2012, while questioning why any country would want to print its own currency.
"What is it that central banks can add in terms of printing their own notes?" Dasani asked. "We can make the investment in terms of machinery and printing processes. If you compare it to state printworks, they don't have the capabilities or investment returns."
One of De La Rue's earliest printing projects came in 1813, when Thomas de la Rue published the first edition of Le Miroir Politique newspaper in Guernsey. From there, the company notched many printing-related firsts, from playing cards to perforated adhesive postage and tax stamps for countries all over the world.
De La Rue also introduced the first practical fountain pens in 1881. It recently received accreditation to produce euro-banknote paper.
In the second half of the 20th century, De La Rue acquired several businesses involving document security, ranging from holographics to physical security equipment.
The future? It's likely to involve radio-frequency identification, or RFID, chips to manage the vast amounts of currency going into, through and out of cash centers around the world, as well as biometrics such as finger-vein authentication for ATMs.
Outside of currencies, De La Rue also is involved in other security documents, from producing New York's driving licenses to authentication labels for Microsoft Corp.
It also holds a 20% stake in the British lottery operator Camelot, an investment that Dasani admits holds little strategic value, but one the company said has been a good financial investment.
While the trends are looking good for De La Rue, some investors are starting to question whether it's climbed a bit too much.
The stock has risen about 16% over the past year, significantly outperforming the FTSE 250 index.
"We believe the shares look up with events at current levels," wrote Paul Jones, an analyst at Panmure Gordon, in a recent note arguing for investors to hold, rather than buy, stock in the firm.
UBS analysts also have a neutral rating.
De La Rue's top shareholder, the investment manager Schroders, has pared its position by selling 7.6 million shares, according to data from FactSet Research.
Dasani takes those comments in stride, saying that Schroders has been an investor from years back when De La Rue was issuing multiple profit warnings and that the company is more focused than it was in the early parts of the decade.
"Previously, five shareholders held more than 50%; gradually they have reduced their holding but others have come in," he added.
"It's a great business. You'd be hard-pressed to find another with our prospects on margins, market position and cash flow."Steve Goldstein is MarketWatch's London bureau chief.
Thomson Financial Mergers & Acquisitions
|Title:||Carlyle Group LLC acquires De La Rue Cash Systems from De La Rue PLC through a leveraged buyout (pending)|
|Publication Date:||Jun 16, 2008|
|Abstract:||US - Carlyle Group LLC (CG) agreed to acquire De La Rue Cash Systems (DE), a manufacturer of cash handling equipment, from De La Rue PLC (DL), for $706.644 mil in cash, in a leveraged buyout transaction. Originally, in June 2008, DL announced that it was seeking a buyer for its DE unit. CG, KKR, Bain Capital and Wincor Nixdorf were named potential bidders. The transaction was subject to shareholder and regulatory approvals.|
|Acquirer:||Carlyle Group LLC|
|Acquirer Business Discription:||Private eq firm|
|Acquirer SIC Code:||6726 - Investment offices, nec|
|Target Name:||De La Rue Cash Systems|
|Target Business Description:||Dvlp cash handling solutions|
|Target Ultimate Parent:||De La Rue PLC|
|Target SIC Code:||3577 - Computer peripheral equipment, nec|
|Free Sample:||Click Here to Download|
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