Property, catering and maintenance services company Spotless Group seems to be making a bit of a last desperate throw in its hostile $556 million bid for Programmed Maintenance Services.
That’s for two reasons. The first is that it’s hostile: a bid with some obvious synergies as a merger between the two groups should really be done on a friendly basis through a scheme of arrangement.
The nature of the bid going hostile from the start has more to do with the attitude of Spotless’ chairman, Peter Smedley, who used to run Mayne Nickless, Mayne Group, Mayne Pharma and now chairs OneSteel. These companies have or had aggressive business cultures. In the case of Mayne Pharma, it crippled the company.
He has a bit of history in companies disappearing from under him: Colonial Mutual and Mayne Pharma are no longer with us having been absorbed by other groups. He and the Commonwealth Bank, who bought Colonial, didn’t get on after the takeover and they parted ways.
When you ad the hostile nature of the offer to the fact that Spotless has promised much but under-delivered in recent years you get the appearance of a company hell bent on doing something.
Spotless has had lingering problems in its retail services division that it hasn’t been able to solve and a lack of solid returns from its core catering and services business in Australia.
In fact comparing the two companies you’d have to say Programmed has had the more stable performance recently.
Spotless informed Programmed’s board yesterday morning of its intention to bid for all the shares in Programmed that it does not already own. It went hostile from the start.
Spotless said it holds 13.2% of PMS’s shares, including a 10.3% interest through pre-bid acceptance agreements with three of Programmed’s largest institutional shareholders.
Programmed largest institutional shareholders are Commonwealth Bank, Invesco Australia, Perpetual and Westpac Banking Corp.
The offer has logic: both companies operate in the same areas of business in Australia of maintenance and industrial services.
But Programmed’s interim profit showed 13% growth after tax to just over $10 million while Spotless’ "underlying" net after tax profit fell 4% to just over $22 million.
Real reported profit was worse than that. Spotless posted a 60% drop in 2008 first half net profit to $13 million, but repeated the line that it remained on track to improve its financial performance during 2008.
It has claimed that before, only to report lower earnings.
In making the bid Spotless seems to be trying to buy Programmed for its revenue and earnings (including the just purchased business of Integrated Group).
Spotless directors and management have talked a lot about its business being on track, especially in Australia: this bid is a sign that it probably needs the synergy from taking over Programmed to meet those claims.
Certainly the market’s initial reaction was sceptical. Spotless shares fell 30c to $3.31 and Programmed’s shares jumped 67c to $5.21, a long way from the $6.11 cash alternative.
Both companies have 52 week highs significantly above current levels: Spotless peaked at $5.08 and Programmed at $6.47. That was midway through 2007 when the private equity mania was still running hot.
That could be either a sign the market thinks there won’t be an offer, or a recognition that Spotless, while starting with 13%, will be pushing uphill to do a deal on a hostile basis.
Programmed shareholders have three options to accept the scrip and cash offer, representing a value of $6.11 for each Programmed share.
Programmed shareholders could receive 1.620 Spotless shares per Programmed share, or $1.50 cash plus 1.223 Spotless shares per Programmed share, or $3.00 cash plus 0.825 Spotless shares per Programmed share.
The bid values 100 per cent of Programmed at around $556 million and implies an enterprise value of $760 million.
If the bid succeeds, it would essentially double the market capitalisation of Spotless to $1.25 billion.
"The offer is compelling for Programmed shareholders, providing a highly attractive premium for their shares and the opportunity to participate in a significantly larger and more diverse Australasian facility services business," Spotless chairman Peter Smedley said in a statement.
Spotless said it is offering a 34.6% premium to Programmed’s closing price of $4.54 on Wednesday.
There are a number of conditions on offer, including a 90% minimum acceptance that will be hard to reach without a recommendation of the Programmed board.
Australia’s largest brick maker, Brickworks seems to be making more money out of property development than on the little rectangular bits of baked clay used to build houses and other buildings.
Brickworks reported a 9.7% lift in net profit to $40.3 million for the six months to January 31, 2008 yesterday, made up of a near 24% slump in earnings from brick making to $25.3 million.
But earnings before interest and tax (EBIT) at its Land and Development division was up 102.3% to $26.3 million and Investments posted a 21.3% rise in EBIT to $17.1 million.
The company lifted interim dividend up 4.2% to 12.5 cents fully franked, so things aren’t that tough, despite the downturn in home building.
Managing director, Lindsay Partridge, said the demand for housing continued to increase due to tight rental markets and record immigration levels.
"At some point, the fundamental shortage of housing construction must be addressed," he said. "Housing construction affordability continues to decline with interest rates increasing and limited access to affordable land in many markets.
"We expect the building industry will continue to face tough times until interest rates start trending down and housing affordability improves."
