Insightful Leadenhall report says deal is fair and reasonable for minority shareholders
Shareholders will vote on the proposed merger of K&S Corporation with Scott Corporation on February 6.
K&S’s bidder’s statement says that, at 64 cents a share on a cash only basis, it represents a premium of up to 33 per cent on its November 4 value of 48 cents.
And while the outcome is something of a foregone conclusion given the Scott family’s control of the majority of shares through AA Scott Pty Ltd, an independent expert’s report says it will also be a fair outcome for minority shareholders but not without some issues.
“There are significant execution risks in the proposed transaction,” Leadenhall Corporate Advisory’s report says.
“It is possible that the anticipated synergy benefits will not be realised and/or the transaction costs will exceed the amounts estimated.
“K&S shares are supported by a high level of asset backing, with net tangible assets per share of $1.83 as at 30 June 2013. By contrast Scott has limited asset backing as it has chosen to lease its depots rather than own them. As a result, the net tangible asset backing of K&S shares will decrease following the Proposed Transaction, with the pro-forma net tangible assets per share being $1.70 as at 30 June 2013.
“One of the issues for the K&S share price is the lack of free float. This makes the company unattractive to most professional investors as the volumes of shares traded on the ASX are too small to allow a meaningful investment.
“An alternative acquisition or a different structure for the acquisition of Scott might have provided an opportunity to increase the free float of K&S and thus improve the market liquidity in its shares. However, the structure of the proposed transaction allows only a very minor increase in the free float.”
On the plus side, however, three main advantages are identified: synergy benefits, diversification and increased market capitalisation.
“Based on our analysis, K&S is paying towards the upper end of what might be considered a fair price of Scott on a standalone basis. However, there are expected synergy benefits from the acquisition that would significantly increase the value of Scott to K&S when compared to the standalone value of Scott. Once these synergies are factored into the analysis they represent significant value for K&S shareholders.
“Scott has a different geographical exposure to K&S. Its customers are also in different industries to K&S’s customers, leading to some diversification of earnings risk from the proposed transaction.”
Leadenhall Senior Advisor Richard Norris and Director Tim Lebbon believe that if the proposed transaction is completed, K&S’s larger market capitalisation may lead to a positive re-rating of K&S leading to share price appreciation.
“We note that while we have assessed the proposed transaction as being fair, a modest change to any one of a number of our assumptions would result in the transaction not being fair,” they state.
“However, non-associated shareholders who may be concerned about this should note that the main reason for this outcome is that AA Scott will receive shares in the Proposed Merged entity, which we have valued including the benefit from anticipated synergies.
“Non-associated shareholders will also benefit from the anticipated synergies, which is the primary reason we have assessed the value of a share in the proposed merged entity to be higher than market trading prices of K&S shares.
“Thus, even if we had adopted slightly different assumptions to those presented in this report, such that the proposed transaction was not fair, we would still conclude that the transaction was reasonable to non-associated shareholders.”
Leadenhall’s analysis included observations on the outlook for both companies. This concluded Scott Corp was likely to have a slightly better financial year due to new equipment reducing operating costs along with higher rates, while K&S ‘s results were expected to be “significantly lower” due to exposure to eastern state manufacturing and the loss of a $30 million Paper Australia contract.