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Why the Spotless Group Holdings Ltd share price is going NUTS today

The Spotless Group Holdings Ltd (ASX: SPO) share price has soared almost 46% today after the company received a takeover offer from Downer EDI Limited (ASX: DOW) for $1.15 per share. It was also revealed that Downer EDI has already amassed a 19.9% interest in Spotless, with Spotless currently recommending that shareholders take no action in relation to the offer.

Spotless Group made its debut on the Australian share market in May 2015. Although the shares soon climbed to around $2.50 each, it’s been all downhill for the outsourced facility, laundry and linen services provider in the time since with the SPO share price dipping as low as 70.5 cents during yesterday’s session.

Indeed, the business has suffered a number of setbacks, including its latest half-year earnings results. Sales revenue fell 9.4% compared to the prior corresponding period, its net profit plunged 31.4% and its interim dividend was down 61%.

However, in its update today, Spotless’ Chairman Garry Hounsell said:

“The Spotless Board continues to believe in the fundamental strengths of our business. These include a blue chip customer base and a strong portfolio of long term Government, Health, Defence and PPP contracts as well as operating the largest commercial laundry business in Australia and New Zealand. We will assess any proposal in the context of our announced strategy reset, including the recently announced contract portfolio restructure, which is expected to be a material driver of growth and enhanced future performance.”

It also noted that Downer’s offer is highly conditional, including minimum acceptance of 90% and no change in Spotless’ earnings guidance provided in February 2017 (amongst other conditions).

As it stands, the Spotless share price is still trading more than 9 cents below the offer price (at $1.057), which implies that investors aren’t altogether confident a transaction will proceed.

Some may also be taking the opportunity to sell out of Spotless. After all, if a transaction does not proceed, the shares will likely retreat, possibly heavily, while there is no guarantee the Spotless share price will trade at these levels again if the business’ performance does continue to deteriorate.

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Motley Fool contributor Ryan Newman 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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