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Red light camera company caught in the fast lane

Investors in Redflex Holdings (ASX: RDF) are no doubt buckling up their seatbelts for what may be a rocky ride. As a manufacturer and operator of speed and red light camera systems, Redflex has been driving an impressive growth path by doling out fines for traffic infringements.

However, it may be about to cop a fine of its own after the uncovering of some wayward practices in the USA division which appear to be less than ethical and may ultimately turn out to be fraudulent. The employee in question allegedly paid certain expenses of a City of Chicago official. The official presumably had some degree of authority in awarding traffic contracts to Redflex and essentially the payment may have constituted a bribe.

With the shares now languishing at near decade lows it is hard to believe that in 2009 the Redflex board rejected buyout offers above $3.50 per share. In 2011, Macquarie Group (ASX: MQG) in conjunction with Carlyle Group, made a $2.75 per share offer, which was put to shareholders, who in turn overwhelmingly voted to reject the buyout. Macquarie Group still sits on the shareholder register with a 20% stake, however wealth manager IOOF Holdings (ASX: IFL) and fund manager Hunter Hall International (ASX: HHL) have both sold down their holdings to below 5% since the latest round of bad news.

As has been the case too often in recent history, management and major shareholders have held out and pushed for unrealistic takeover valuations. As the subsequent business performance of a number of takeover targets including Redflex, Qantas (ASX: QAN), and Nufarm (ASX: NUF) have shown – the “smart money” wasn’t too smart at all.

Foolish takeaway

It is unfortunate for current Redflex shareholders that what is likely (hopefully) an isolated incident by one or a few employees could have major implications across the whole North American division. Redflex is fundamentally a reasonable business that produces good products. The whack to the share price will likely get some investors interested but given the potential ramifications from the Chicago allegations, it may be better to adopt a wait and see approach.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur owns shares in Macquarie Group and Hunter Hall International.

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