The imbroglio which is the $692 million Ferrovial takeover for services and detention centre operator Broadspectrum (BRS) will continue for a few more weeks amid rising uncertainty about a key federal government contract.
As a result of this uncertainty Ferrovial is considering whether to pursue its takeover of Broadspectrum and yesterday extended the bid for two more weeks until March 7.
The move seems to be a ploy to put pressure on Broadspectrum shareholders to acceopt the $1.35 a share offer. That saw the shares sold down sharply in yesterday’s market shakeout – the wider market plunged a nasty 2.3%, but Broadspectrum shares slumped more than 13% to $1.09.
Broadspectrum (formerly known as Transfield) announced on Monday that it had been told by the federal government that it is no longer the sole preferred bidder for a new, five-year contract to run the detention centres.
This has instead, seen the Department of Immigration and Border Protection extend the current contract by 12 months to give it time to increase the scope of the tender for the new deal.
Ferrovial yesterday described the change to the contract status as a “significant and negative” one that adversely impacts the value of the takeover target.
“Ferrovial will now consider the implications of this change on Broadspectrum’s business and Ferrovial’s offer for Broadspectrum,” the Spanish company said yesterday in a statement.
The Federal government’s contract extension starts March 1 and will last past the federal election, due later this year. Broadspectrum has operated the detention centres since September 2012.
It means there is now considerable doubt as to future earnings for Broadspectrum past 2016-17.
In its statement on Monday, Broadspectrum upgraded its annual underlying earnings guidance to between $280 million and $300 million as a result of the new 12-month contract. That compares to its previous earnings guidance of $265 million to $285 million.
The company also said underlying earnings for 2016-17 should be in excess of $300 million.
But this has forced a change in valuation of the company by Ernest & Young, Broadspectrum’s independent expert in this bid. Ernst & Young had previously valued Broadspectrum shares at between $1.71 and $1.98, well above Ferrovial’s $1.35 a share offer.
But as a result of the government news, Ernst & Young has now cut its valuation of Broadspectrum shares to $1.60-$1.85, but maintained its view that the Spanish offer is not fair.
That saw the Broadspectrum shares fall sharply yesterday as nervy speculators started worrying that the Spanish company’s bid might not be around after March 7.
But the Spanish company’s statement has had the importance (from its point of view) of reminding Broadspectrum shareholders that without the bid, the target company’s shares might well slide. They were trading around 83 cents before the bid emerged late last year.
Ferrovial has claimed that if its bid fails, the shares will drop back to around 73 cents. Yesterday’s sharp share price falls is a reminder of that warning and will add pressure on the Broadspectrum share register.
