Skilled Group Ltd. to wed Programmed Maintenance Services Limited: What investors need to know

Analysts are likely to be upgrading the stocks after Skilled Group Ltd. (ASX:SKE) agreed to back the sweetened deal to merge with Programmed Maintenance Services Limited (ASX:PRG).

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Shares in Skilled Group Ltd. (ASX: SKE) are expected to surge after it threw its support behind a sweetened offer to merge with fellow labour hire company Programmed Maintenance Services Limited (ASX: PRG) to create a $750 million entity.

Programmed is offering 0.55 of its stock and 25 cents cash for every Skilled Group share that values the latter at $1.79 compared with its last closing price of $1.54 a share.

This compares to Programmed's previous offer of a 0.5032 share swap and 25 cents cash, which was quickly rejected by Skilled Group's board.

The improved terms will see Skilled Group's shareholders own 52.4% of the merged group with the deal forecast to be "materially earnings per share (EPS) accretive" for the combined group, although you will have to ignore transaction, integration and other one-off costs associated with the merger.

I have been expecting this outcome since Programmed first approached Skilled Group with an offer in December last year as I believe the merged group will be viewed in a positive light by the investment community because there's more than $20 million in synergies up for grabs post-merger.

The amount is nothing to sneeze at as it represents around a quarter of the combined full year net profit from Programmed and Skilled Group.

These synergies are expected to rise to $35 million within three years of the marriage and lead to double-digit EPS growth in 2015-16 and 2016-17.

There could potentially be even more upside as the synergies primarily focus on cost savings and not the new group's stronger market leadership position, improved earnings diversity and cross selling opportunities.

If the stated synergies and earnings forecast are to be believed, I think analysts will be upgrading the stocks as consensus was tipping a drop in EPS for Skilled Group and single-digit growth for Programmed.

Depending on where the stocks trade when they resume trading later today, this could be an opportunity to buy the stocks for the merger.

Skilled Group's board is urging shareholders to vote in favour of the deal. I own shares in Skilled Group and there're no prizes for guessing which way I will be voting.

Motley Fool contributor Brendon Lau owns shares of SKILLED Group Limited.. Follow me on Twitter - https://twitter.com/brenlau The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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