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Is this a $500 million reason to buy Spotless Group Holdings Ltd?

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What: Opinion has been divided for some time as to the outlook for facility services and laundry operator Spotless Group Holdings Ltd (ASX: SPO).

Investors in the initial public offering (IPO) are no doubt bewildered at the approximate 30% decline in share price since the stock first hit the ASX around two years ago.

Meanwhile, cynics of the float say the IPO had all the trademarks of a private equity “flip job”.

Conversely, value investors are sniffing around weighing up the downside risks versus the potential upside rewards on offer at the current price of $1.16 a share.

So What: Value investors received a sign on Monday that perhaps the rewards do outweigh the risks with Spotless providing a market update which contained two important pieces of information.

Firstly, the group affirmed that it was on track to meet its previous earnings guidance for the current financial year.

Secondly, the group noted that parties had shown interest in possibly acquiring its Laundries business.

Now What: According to research from analysts at Macquarie Group, a sale of Spotless’ Laundries division could fetch between $400 million to $500 million pre-tax. Analysts at Citi are even more bullish, slapping a price tag of between $518 million and $666 million on the division (source: Australian Financial Review).

With a market capitalisation of $1.25 billion but a heavy debt load as well, a sale could potentially go some way to unlocking the inherent value of the group’s largest and most important division, Facility Services.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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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