On Monday, Skilled Group Ltd (ASX: SKE) catapulted 20% up on the announcement it received a "merger of equals" proposal from competitor Programmed Maintenance Services Limited (ASX: PRG). The two micro-cap companies provide workforce solutions services, with Skilled Group being the market leader employing over 50,000 skilled workers. Programmed is also a leading service provider with over 10,000 skilled and semi-skilled staff.
Affected by the weak economy and the slowdown in mining, demand for workforce solutions has fallen off, sending the share prices of Skilled and Programmed down 54% and 24%, respectively, over the past twelve months.
Although the two companies have had ongoing talks about merger possibilities, Skilled Group considers this offer very opportunistic. Programmed Maintenance says it is offering Skilled Group shareholders a 21.3% premium on the stock's 16 December closing price ($1.13). However, many takeover offers use a volume weighted average price over a certain time period. The 16 December price was close to a multi-year low.
The deal would offer 0.5032 Programmed Maintenance shares plus 25 cents cash per Skilled Group share for each Skilled share. Together, the total proposed value is $1.38 ($1.13 + $0.25).
The market reacted by sending Skilled Group shares up to $1.52 on Monday, indicating a higher offer is expected. Interestingly, Programmed shares also rose 7.95% to $2.58, so investors believe the merger proposal has value and Programmed will gain from the merger as well.
Currently, Skilled Group has a market capitalisation of $360 million and Programmed stands at $306 million. Programmed estimates about $15 million in post-tax merger synergies. Both companies agree that synergies and cost savings can be achieved.
Still, Skilled management thinks that not using a volume weighted average share price base doesn't reflect appropriate value for its shareholders. That's why Skilled and the market are expecting a better offer.
For investors interested in buying on the back of this merger proposal, it would be a "bottom of the cycle" investment as iron ore, coal and now oil are all at multi-year lows and companies are scaling back contract work to cut capex.
The big question should be, "If this merger doesn't go through, would I want to own either of the companies?" If you missed out on Monday's 20% pop in Skilled shares, the spread between the current Skilled share price and the proposed merger value are indicating the market expects at least another 10% more.
