Morpho Detection

Smiths Group Plc agreed to buy the explosives-detection arm of jet-engine maker Safran SA amid heightened demand for automated systems that can help prevent terrorist attacks on airports and other infrastructure. Smiths will buy Morpho Detection of Newark, California, in a deal valued at $710 million, the London-based company said in a statement Thursday.

Morpho, whose technology is employed at border points, nuclear power stations, military installations and government buildings, will be combined with Smiths’s own detection unit, which specializes in systems that identify chemical agents, radioactive materials and contraband, as well as explosives.

“The threat environment is constantly evolving and becoming more complex,” Smiths Chief Executive Officer Andy Reynolds Smith said on a conference call. “The response demands cutting-edge technology and cost-efficient solutions.”

Morpho’s product line includes machines that scrutinize checked luggage using CT scans as well as X-rays, something that’s a requirement in the U.S., where Smiths hasn’t previously been able to compete. L-3 Communications Holdings Inc. and OSI Systems Inc. are among market leaders in the sector.

Morpho, which posted a $56 million operating profit last year equal to 18 percent of its $320 million in sales, also makes hand-held devices that swab bags for explosives and narcotics by analyzing samples of invisible particles.

As terrorist attacks continue to occur, there has been a need for new developments in technology to thwart the incidents, creating a space for increased M&A in the space. In February, Caci International Inc. (NYSE: CACI) completed its purchase of L-3 National Security Solutions Inc., which provides security and other technology services to the U.S. Department of Defense and U.S. Federal Civilian Government.

Share Boost

Annual savings from merging the businesses will reach $30 million in the third full year after completion, expected early in 2017 after regulatory hurdles are cleared, Smiths said, while one-off integration costs will also total $30 million. The detection market is being spurred both by the heightened security threat and an ever increasing number of flights, with its annual value likely to reach 4.5 billion pounds ($6.4 billion) by 2021, Reynolds Smith said.

Morpho looks to be “a better business” than Smith’s own detection arm, being less dependent on new projects, Investec analysts Michael Blogg and Chris Dyett said in a note. The U.K. company’s “first sizable acquisition for years” means it will be too highly leveraged for further deals and may now turn to disposals, they said.

Smiths shares rose 5.7 percent and traded 47 pence, or 4.2 percent, higher at 1,155 pence as of 10:44 a.m. in London, taking gains this year to 23 percent. Safran was priced 0.1 percent higher at 61.79 euros in Paris, where the aero-engine specialist is based. CEO Philippe Petitcolin said in a statement that the disposal stems from the company’s plans to focus more on its core aerospace and defense markets.

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