Private Equity Firms Eyes Spotless Group

Spotless Group Holdings [ASX:SPO] share price plummeted almost 40% in early December. The drop was in response to profit warnings. As a result, Spotless is super cheap. Well, maybe ‘cheap’ isn’t the right word. Let’s say Spotless is now an attractive takeover. And there are many private equity firms eyeing the cleaning/catering company.

Spotless Group Jan 2016

Source: Yahoo finance

How it all began

Pacific Equity Partners acquired Spotless back in 2012. The private equity firm first decided to re-float the business in April last year. Pacific Equity Partners had it all figured out. Aggressive growth for Spotless was on the minds of all the private equity partners. First they’d grow the service company, and then sell it off quick smart. Spotless’s management believed annual financial results for FY16 would ‘materially exceed’ those of FY15.

In two months’ time a contradictory announcement surfaced.

They didn’t meet high growth expectations. Spotless announced earnings before interest, taxes, depreciation, and amortization (EBITDA) would fall by 10%. But Spotless’s downfall is different to the Dick Smith Holdings [ASX:DSH] situation. Spotless still has support from its banks. They’re far from on their own.

Chief executive, Martin Sheppard tried to convince investors that market reactions were only temporary. But his comments fell on deaf ears. Even chairman, Margaret Jackson pleaded with investors.

Jackson used Spotless’s 15 year contracts as evidence for their future earnings. But investors aren’t listening. This leaves Spotless in a vulnerable position. Spotless could be just months away from a potential takeover.

Possible takeover

When a company announces a potential takeover share prices usually go up. This is because the acquirer pays a higher than the market price for the company. Of course they’d prefer to buy the company for a cheaper price. But the acquirer needs to offer existing shareholders an incentive to sell. For example, if the market price is $2 per share then the acquirer may offer to buy shares for $2.50. Shareholders can then accept or reject this offer. Share prices will then usually jump to the acquirer’s offered area.

A bid hasn’t surfaced yet. But overseas investors have taken a liking to Spotless. Yesterday shares jumped 7.77% on the potential of an offshore acquirer.

And the weak Australian dollar isn’t doing Spotless any favours. The low AUD is reducing the cost to acquire Spotless for overseas acquirers. This coupled with the large share price fall makes Spotless is a prime takeover target.

If a bid does emerge, Jackson is sure to challenge the offer. She will need to uphold her earlier comments of recent performance as only a minor blip.

Should you buy Spotless for 2016?

It’s not just management who believe Spotless is undervalued. Many analysts also agree the market has overreacted to the earnings announcement.  It’s still unclear whether Spotless will be taken over. There has only been interest from overseas buyers, not offers.

The most promising contenders, like London-listed Compass group, have yet to place bids. And its unlikely Spotless will accept opportunistic bids. Spotless still maintains that current share prices don’t reflect its true value.


Harje Ronngard,

Junior Analyst, Money Morning

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