Market bulls will be pleased to see that even distressed companies are getting takeover interest with Cardno Limited (ASX: CDD) the latest in the embattled engineering services space to announce it has received a bid.
Shares in the US-exposed infrastructure consultancy jumped 15.6% to a more than one-month high of $2.89 in lunch time trade after the company received a partial, or proportional takeover offer from private equity group Crescent Capital Investments.
What's a partial bid? In Cardno's case, it's knowing that having half a cake is better than none.
Crescent, which bought a 19.62% stake in Cardno, is offering to buy one out of every two shares held by Cardno shareholders for $3.15 cash per share.
That's a pretty generous offer as it is priced at a 26% premium to Cardno's Friday closing price of $2.50, and if all shareholders accepted the deal, Crescent Capital will own around 58.9% of the struggling company.
Crescent Capital wants to install a new management team and board to revive the fortunes of Cardno with the stock shedding more than half of its value over the past year as its bottom line crashed 285.9% to a net loss of $145.2 million due to weak demand for its services here and in the US. The Americas account for around 65% of Cardno's revenue.
It's not only its weak financial performance that has prompted Crescent Capital to pounce. The company has gone through two chief executives in less than two years with Richard Wankmuller taking the top job since the start of the current financial year.
Private equity firms like Crescent Capital make their pound of flesh by buying distressed companies with poor leadership teams and dysfunctional management systems that they can fix-up reasonably quickly and on-sell the improved business for a profit within three to five years.
Cardno has told shareholders not to take any action until its board releases a formal recommendation, but it's hard to imagine the target supporting the bid when so many of them are likely to be left without a job.
But Cardno will probably leave that part out of its defence and stick to the tried and tested argument about the bid undervaluing the company.
Shareholders are caught between a rock and a hard place, in my opinion. There's no doubt that Cardno's management has lost a lot of credibility but being a minority owner in a company with one large shareholder means you are nothing more than a passive passenger.
Given the two difficult choices, I would be inclined to back the Crescent Capital bid. At least I know our interests are better aligned.
Crescent Capital also wants Cardno to reduce or suspend dividends so it can focus on paying down debt and to use surplus cash to undertake an on-market share buyback whenever the stock falls too low.
The bidding firm said it has a good track record of turning around businesses like Cardno but warned that earnings in the next year or two could fall as Cardno requires additional investment to secure longer-term growth.
The bidder said it didn't want to make a full takeover because it wishes to build on the "owner" mindset of Cardno's employee shareholders. It wants to encourage employee shareholders to retain their shares and work to drive the company's future performance.
Besides the standard type conditions like adverse regulatory actions, the bid is dependent on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) not closing below 4,564 points for two consecutive trading days and Cardno getting no new financing arrangements that are equal or more than $50 million.
Crescent Capital recently bought the underperforming pathology arm of Healthscope Ltd (ASX: HSO) for $105 million.
