Downer EDI’s (DOW) hostile bid for the troubled Spotless (SPO) is a forgone conclusion according to the market. Spotless’s share price fell 2.3% to $1.055 yesterday – 10 cents under Downer’s proposed $1.15 a share offer price.
That tells us no one expects another, higher bid to emerge, despite some commentators and analysts claiming the bid has more to play out.
Downer has built a 19.9% stake in Spotless and the $1.15 cash offer is a significant premium to the target’s share price of 72.5 cents close on Monday. It is also well under the IPO price back in 2014 of $1.60.
To help fund the offer, Downer EDI has turned to its shareholders with a two-for-five share issue, which is priced at $5.95 – a large 20% discount to its last traded price. That discount is a sign Downer is worried that its shareholders might not be fully behind a hostile bid for a serial underperformer like Spotless.
Downer has told investors that buying Spotless would help to broaden its offering in the facilities and asset management services sector while also reducing its exposure to the resources sector, where times remain tough, despite the patchy recovery.
Spotless generates the bulk of its earnings from servicing government and commercial facilities, although the problem for bidders has been its exposure to capital intensive, low margin laundry and linen services. The company has written down the value of assets in this area and promised action to improve performance. Now it looks like being Downer’s headache. What’s the chance Downer will try and sell it off.
Downer EDI said the purchase would be earnings per share accretive and while the combination of the two businesses is expected to deliver pre-tax cost synergies of approximately $20 million-$40 million a year. But those gains will not emerge immediately and will take time to emerge, a point that further worries some investors.
“The Downer management team has what it takes to turn the Spotless business around and to create a highly competitive, customer focused and successful service organisation,” Downer chief executive Grant Fenn said this week.
"This is a strategically and financially compelling transaction with the potential to deliver growth across the combined portfolio and drive shareholder value."
Spotless directors have said the takeover offer is “highly conditional, with conditions including a minimum acceptance of 90 per cent, no change in Spotless’ earnings guidance provided in February 2017, regulatory approvals” and the like.
“The board of Spotless advises shareholders to take no action in respect of Downer’s takeover offer," it said. It is only a matter of time.
Some investors reckon Downer should have offered a lower price, say $1 a share and then allow itself to be negotiated up to $1.10 to $1.15 a share to get the board recommendation.
