Programmed Survives But Spotless Might Soon Sweeten The Deal With Cash

The Age

Thursday May 8, 2008

Malcolm Maiden

An independent expert's report would have added weight to the target's defence.

PROGRAMMED Maintenance Services survived a crucial day in its defence against Spotless Group's hostile takeover yesterday, but it is far from out of the woods.

The group copped an unacceptable circumstances declaration from the Takeovers Panel over its use of share price data and commentator quotes in statements about the triple-barrel bid.

Ahead of that, it released its formal rejection of the offer, and said it had found a 16% block of shares to counterbalance Spotless' 13.2% foothold.

But the earnings numbers it released were below expectations, and if confirmed by the auditors will fall short of a profit figure specified by Spotless as a bid condition.

Programmed argued strongly in its Target's Statement that the offer undervalued the group and its prospects, but did not commission an independent expert's report. It had more success with an attack on Spotless' patchy sharemarket track record, a potential Achilles heel for the bid given that Spotless is offering shares.

Spotless acquired 2.9% of Programmed ahead of the launch of the offer at the end of March, and obtained pre-bid acceptances covering another 10.3% from three major shareholders - BT, Colonial and Perpetual.

It was a nimble move, and Programmed fashioned a reply yesterday, by stating that its directors intended to reject the bid for the 3% they controlled, and that shareholders who controlled another 13% were also opposed.

But Programmed's defensive block is not rock-solid. Spotless has an agreement covering its shares that holds unless there is a higher counter-bid that it does not match within five business days, and if that occurs it can still call the shares covered by the agreement at the highest of its three alternative bid prices, plus 75% of the difference between that price and the counter-offer.

Programmed on the other hand says that the shareholders who control the 13% block it is relying on are opposed on a non-binding basis, and subject to no new information becoming available. The holders of the shares Programmed has located could change their mind, in other words - if Spotless sweeps past 50%, for example.

Substantial shareholder opposition to the bid terms is a potential problem for Spotless nevertheless, because its bid contains the standard condition that acceptances reach at least 90%, the point at which Spotless can compulsorily acquire the balance and move to full ownership.

Spotless can drop the minimum acceptance condition, of course, but takeovers that carry the bidder to between 50% and 90% are far from ideal: the bidder has control, but does not have ownership, and access to the target company's cash flow.

Spotless is offering Programmed shareholders three choices. A pure share exchange of 1.620 Spotless shares for every Programmed share, valued at about $5.43 on Spotless' current price, or 1.223 shares and $1.50 cash, currently valued at $5.60, or $3 cash and 0.825 shares per Programmed share, worth $5.76.

All three are worth less than the headline value of $6.11 a share that Spotless originally announced, because Spotless' share price has fallen since the bid was made. All three are however still pitched above Programmed's own share price, which closed unchanged at $5.05 yesterday.

Programmed's formal defence document has kept the game alive, but it doesn't make a compelling case for a higher offer.

The absence of an independent report is difficult to explain if Programmed is confident about its prospects, and while the group has reported that earnings before interest, tax and amortisation were up from $38.8 million to $56.6 million, the result included a 10-month, $24.1 million contribution from Integrated Group, which merged with Programmed in early June last year, and was about 10% below analyst estimates overall.

It was also below Spotless' bid condition that earnings be not less than $56 million. Spotless won't automatically walk if the number is confirmed by audit, breaching the condition. But the group and its advisers are closely analysing the result, and a forecast for a 15% rise in earnings in the current year that was also lower than expected.

Programmed fared better with a second line of argument that Spotless' bid was not adequately compensating Programmed shareholders for taking exposure to a company that has been a chronic sharemarket underperformer, with its shares losing 48% between March 2001 and March 26 this year, ahead of the offer announcement. Programmed's shares increased by more than 140% in the same period.

Spotless will claim that the past is no guide to its future on two grounds: that it is now a much more dynamic company with an independent board under the leadership of Peter Smedley, who took over as chairman early last year; and that the two corporate services groups are a natural, synergistic fit, to the point where Spotless already subcontracts Programmed for painting work, paying a margin that would be retained by shareholders if the businesses merged.

And it scored a process victory yesterday when the Takeovers Panel declared unacceptable circumstances surrounding Programmed's use of price data and quotes from commentators, and ordered that Programmed clarify the situation with its shareholders.

Spotless' share price record is the weak link in its offer, however, and with 16% of the shares at least initially inclined not to accept, a change in the mix in favour of cash might be needed.

mmaiden@theage.com.au

© 2008 The Age

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