Shares in Melbourne-based industrial services company Spotless Group Ltd closed up a few cents yesterday, after media reports claimed that it was about to get a second approach from a private equity group.
Spotless told the ASX in the morning that it had not received any new private equity take-over proposal.
And then repeated that comment in a reply to a later ASX query about its recent price rise, which has seen the shares rise 35% since October, as the overall market has weakened.
Spotless said it was not aware of any "unannounced information concerning it that explains recent trading in the company’s securities" and noted its earlier release on the media reports.
According to The Australian Financial Review, private equity fund Pacific Equity Partners is finalising a take-over proposal for Spotless Group, and intends to notify the Spotless board of an offer within days.
The shares opened up 9c or 3.8% at $2.44, hit the day’s high of $2.45, then eased to end the day up 4c at $2.39.
An offer from Pacific Equity Partners would be the second private equity bid for Spotless in just over six months.
US private equity firm Blackstone lodged a conditional $657 million take-over offer in May and the Spotless board rejected that offer, saying it did not reflect the fundamental value of the company.
The media report said a statement could come today or tomorrow from the suggested buyer, Pacific Equity Partners.
But investors (and Spotless suppliers and employees) should be alert to the fact that there was nothing in the AFR story and commentary yesterday that examined Pacific Equity Partner’s track record. In fact it has been pretty spotty so far in 2011.
There was the terrible collapse earlier this year of booksellers Borders and Angus & Robertson and the loss of 2,500 jobs and untold millions of dollars, especially by those who had bought Borders’ vouchers and were forced to spend more money to get them honoured.
Whitcoulls in New Zealand and a newsagency chain and calendar business were also shut.
The trend towards internet buying, weak retail sales and cautious consumers were all blamed.
But Borders and A&R were carrying more than $100 million in debt, had poor management (unlike the original Borders’ teams).
Employees lost their jobs, shopping centre managers lost income and the book industry was hit hard.
Nor was there no mention in the AFR of the sales and share price collapse suffered by investors in what is now the worst float of 2011: the sale at $2.50 a share of Collins Foods, the company which owns KFC and Sizzler chains. Collins was actually the biggest float this year, now it’s the biggest dud, and came from Pacific Equity Partners.
Collins shares fell on listing and plunged at the start of this month after a surprise earnings downgrade.
They fell 45c or 24% in one day (November 2) after the downgrade was made. They have since fallen further and closed at $1.21 yesterday on the ASX.
Pacific Equity Partners owned 52% of Collins.
Besides Collins Foods, retailers such as Myer haven’t sparkled since being floated by the private equity owners. The Myer sale price was $4.10, which has never been seen, except in the prospectus.
But not all private equity deals go bad. Shareholders in Kathmandu, the outdoor clothing retailer, who paid $1.70 a couple of years ago and have hung in, had shares valued at $2.02 at the close of trading yesterday.
Private equity is fine when credit conditions are calm, the economy is doing well and consumers are confident.
But the key is all the debt loaded onto the acquired company and the fees and charges levied on the company (such as for being loaded up with debt, and then unloaded).
Too much debt is a killer when the economy is sluggish, especially where consumption is concerned, such as retailing or supplying the retail sector. Cash flows and debt servicing become tougher and pressures mount.
Look at the private equity-owned Colorado Group which collapsed this year under the weight of too much debt, courtesy of Affinity Equity Partners of Hong Kong. Colorado has been restructured and sold to new owners, but not until millions of dollars in losses have been taken and over 1,000 jobs lost.
