It is quite obvious from the contents of the letter from Programmed Maintenance Services’ chairman to his counterpart at Skilled Group that the two groups have had very detailed discussions about a merger in the past. It is equally obvious from the nature of the Programmed proposal and Skilled’s initial response that this isn’t the merger transaction Skilled envisaged.
Programmed confirmed today that it had put a merger of equals proposal to Skilled on December 17. The indicative terms of the merger were 0.5032 Programmed shares and 25 cents cash for each Skilled share.
The share-swap would effectively see both sets of shareholders emerging with 50 per cent of the merged group and sharing the upside and value of the synergies, while the cash element would effectively provide Skilled shareholders a 21 per cent premium over market for their shares.
In the letter from Programmed’s chairman, Bruce Brook, to his counterpart at Skilled, Vickki McFadden, he said that discussions between the two companies’ advisers and chief executives had "for some time" confirmed the industrial logic of combining the two companies.
"The Programmed board and, we understand, the Skilled board agree on the merits of the combination in terms of compelling strategic rationale and the potential to create significant value for both companies’ shareholders," he said.
The Skilled board and management might see merit in a combination of the two companies, but it is apparent that they aren’t too happy with the particular proposal Programmed has put to them.
"Skilled considers that this approach from Programmed has been opportunistically timed and is based on a closing price for Skilled well below medium and longer term volume-weighted average prices. Any combination of Skilled and Programmed would need to be pursued on terms which reflect appropriate value for Skilled shareholders," the company said in its initial response today.
The logic of putting the two companies together is clear. It would bring together Skilled’s contract labour business with Programmed’s property and facilities management business to create a group with scale, a more diversified range of service businesses and synergies estimated, according to Brook, at more than $20 million per annum by the companies’ managements.
The fact that Programmed has gone it alone and disclosed its approach and its terms and the aggressive response from Skilled says, however, that whatever Skilled might think about the logic of combining the companies, it isn’t at all enthusiastic about the terms.
That may be because, for much of this year, if there had been a proposal to combine the companies, it would have been effected via a takeover of Programmed by Skilled rather than a Programmed offer for Skilled.
At the start of the year Skilled’s market capitalisation was nearly twice that of Programmed, but its exposures to the resources sector and the oil and gas sector in particular have ravaged its share price, which has nearly halved in the past six weeks alone and is down more than 60 per cent over since the start of the year.
While Programmed’s price has also fallen by about 30 per cent over the course of the year the nature of its businesses means it hasn’t been as affected as Skilled and the market capitalisations of the two companies are now very similar. Where it was inconceivable that Programmed could have bid for Skilled at the start of the year, a Programmed-led transaction is now quite feasible.
Programmed’s strategy could be regarded (as Skilled does regard it) as opportunistic, given not only the meltdown in Skilled’s share price but the fact that Skilled is in the middle of a leadership change.
The well-regarded Mick McMahon will hand over to former Foster’s chief financial officer Angus McKay on January 20. It might or might not be a coincidence that Programmed lobbed its proposal two days after McKay’s appointment was announced. Under its proposal its chief executive Chris Sutherland, would lead the merged group.
One assumes that Programmed is hoping that the logic of the proposal -- not just the synergies but the reduced volatility in earnings and the doubled market capitalisation -- will generate pressure from Skilled’s institutional shareholders on the Skilled board.
There is a big cross-over between the registers of the two companies, which could create a constituency among Skilled’s shareholders for the deal.
Ultimately the combination of the two companies does have strong business and sharemarket logic. Whether the proposal succeeds or fails, however, will hinge on perceptions among the directors and shareholders of both companies of the relative value contributed and retained by their shareholders.