Spotless: Is the takeover dead in the water?

The longer the process takes, the more likely the offer will fall over or be scaled back

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What: Spotless Group Limited (ASX: SPT) has issued an announcement stating that it has been in discussions for several weeks with Pacific Equity Partners Pty Limited (PEP), since it closed its due diligence 'data room'.

Basically, a data room is a high security data location that contains electronic copies of company contracts with customers and suppliers along with financial data and accounts information. It allows a prospective acquirer, such as PEP in this case, to take a much closer look at Spotless than it can from just public information.

The process of due diligence can often take some time – given the complexity of the material and any particular issues discovered in the due diligence data room. However, the general rule is that the longer the process takes, the less likely the deal is going to go through.

Of course, PEP wouldn't be the first suitor to play it cool – using the duration as a negotiating tactic, particularly in the absence of another potential buyer.

PEP and Spotless have continued to have discussions to see if they can come up with a proposal to put to Spotless shareholders, recommended by the Spotless Board.

PEP announced a proposed takeover offer for Spotless back in November 2011, worth $2.68 per share.

So What: According to the Australian Financial Review (AFR), PEP management travelled to Perth last week to meet Spotless chairman Peter Smedley. The report also stated that a revised proposal from PEP was put to Spotless's board last week. Given Spotless has not yet released it to the market, it is possible that the offer may have been revised downwards. If it was good news for shareholders, it's likely that it would have been released immediately.

I suspect that the AFR has a source close to or on Spotless's board or at PEP. The AFR broke the news about a takeover offer two days before the company announced it to the market, with Spotless even issuing a notice to the ASX stating that no such deal had been received.

Two days later, and one day after the ASX issued Spotless with a price query, Spotless was forced to announce that it actually had received a takeover offer from PEP.

The AFR also broke the news about the Blackstone Group takeover offer for Spotless in May 2011. That offer ended up in the bin – maybe PEP discovered why Blackstone decided to not proceed?

Now what: It appears that Spotless wants at least $2.80 per share, and the latest news suggests the takeover offer has been revised downwards. Before the initial takeover announcement, Spotless shares were trading around $2. Should the deal collapse and PEP walk away, the share price is likely to crash back down towards that price, and that appears to be the most likely scenario.

Despite my views on the most likely outcome, there's a better than even chance that Spotless will be swallowed up by private equity at some stage in the future. With two takeover offers announced in 2011, and the continued poor performance of the company, Spotless is just begging for someone to take it over and fix it up.

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Motley Fool contributor Mike King doesn't own shares in Spotless. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

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