Spotless talks up savings in Downer rebuff

Tuesday 19th December 2006 AFR Photo ESTELLE JUDAH 0403178677 Portrait of Garry Hounsell, Chairman of emitch Ltd, as he announces acquisition of Mitchell & Partners. egz061219.001.007 SPECIALX 59695 Photo: Estelle JudahTakeover target Spotless Group claims the hostile bid from Downer EDI fails to properly take into account merger savings that both companies had identified during more amicable talks in June last year.

In a target statement released on Thursday to the ASX, the support services company repeated its claims from earlier in the week that the bid from Downer at $1.15 was opportunistic and failed to reflect the company’s growth prospects.

The company also revealed that both parties had considered potential savings when they held friendly merger talks in June last year.

Spotless chief executive Martin Sheppard told Fairfax Media that although those talks were “embryonic and preliminary” they had identified savings of up to $60 million from combining the businesses.

In its bid Downer has estimated those synergies at between $20 million and $40 million.

Mr Sheppard said the figure was far too low for a merger of “two large” listed companies given Spotless alone had overheads of about $150 million a year.

“That just doesn’t compute,” he said. “That, in percentage terms, doesn’t work.”

Mr Sheppard said that although those merger talks had not gone ahead there was “some logic” to blending Downer’s “hard” construction and engineering services business with Spotless’ “softer” social infrastructure focus.

The merger would have also created a company with about $9 billion a year in turnover and moved it up the “ASX leaderboard”, he said.

In the statement Spotless re-affirmed its earnings guidance of $80 million to $90 million for the current year, but also pointed to expected earnings for the next financial year of between $85 million and $100 million.

That compares with an average broker forecast for 2018 of $83 million. Spotless shares did not move in response to the announcement and were steady at $1.08.

Mr Sheppard played up the long-term reliable nature of the Spotless contract book, particularly in public private partnerships and said the prospects for the company looked good through the next 18 months and beyond.

Asked whether his position would be tenable if the Downer deal foundered and that forecast was missed, Mr Sheppard said: “That is implicit in what we have done. Let me say this, the board and I are acutely aware of our fiduciary duties when evaluating a bid.

“In terms of CEO’s performance and board performance that needs to be measured over time in the context of the market conditions.”

The target statement says all Spotless directors intend to vote against the deal.

Downer declined to comment but is expected to make a statement early next week.

A key player in any deal is Coltrane Asset Management which holds more than 10 per cent of Spotless.

Downer’s bid is conditional on 90 per cent acceptance from Spotless shareholders.

Mr Sheppard said he had spoken to Coltrane as recently as Thursday morning and they were “really supportive of the management plan”.

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