Companies aren't waiting around for another rate cut to lower their cost of capital before putting their cash to work with a number of acquisitions announced this morning.
UK-based fund manager Henderson Group plc (ASX: HGG) is buying some assets from IOOF Holdings Limited (ASX: IFL), Pact Group Holdings (ASX: PGH) admitted it is thinking about buying contract manufacturer Jalco Group, G8 Education Ltd (ASX: GEM) is acquiring eight new childcare centres and outsourcing services company Spotless Group Holdings Ltd (ASX: SPO) is swallowing Utilities Services Group Limited.
It is the latter that catches my eye as I believe it will put pressure on Skilled Group Ltd. (ASX: SKE) and Programmed Maintenance Services Limited (ASX: PRG) to reach a compromise to merge.
While Skilled and Programmed continue to negotiate, Spotless has signed a conditional agreement to buy over Utilities Services Group (USG) to gain exposure to the gas, water and electricity distribution and transmission industry.
USG provides manpower solutions for meter readings and installation services, which Spotless believes is "extremely attractive" because of the trend for state governments to privatise these assets and as utility companies increasingly look for outsourced solutions as a way to cut costs.
USG generates annual revenue of over $200 million but Spotless has not given other information that would allow investors to work out how good a deal this really is.
However, I believe Spotless will be able to fund the acquisition from its cash reserves as USG is a relatively small company to swallow given that Spotless produced $2.6 billion in revenue in the last financial year and had close to $80 million in cash at the end of the 2014 calendar year.
The market isn't taken with the deal as the stock tumbled 1.9% to a near three-month low of $2.11. This is probably because Spotless' margins will feel a squeeze from the acquisition.
While Spotless made a 9.6% earnings before interest, tax, depreciation and amortisation (EBITDA) margin in 2013-14, I doubt USG would be able to generate a margin that's anywhere close to that.
As a staffing solutions company, USG's EBITDA margin is probably similar to Skilled at around 5%. Spotless's core business is to provide facilities management and maintenance services.
Spotless shareholders are also probably a little nervous that the group is expanding into an area outside of its core specialty.
We could see a marginal upgrade of consensus earnings for Spotless on the back of the deal with analysts polled on Reuters tipping an 8.4% increase in revenue to just over $3 billion and a 13% uplift in earnings per share to 14.4 cents for 2015-16.
This puts Spotless on a relatively undemanding price-earnings (P/E) of 14.7 times and yield that's close to 6% when franking credits are included.
However, I believe a merger between Programmed and Skilled would yield far bigger synergies, and from that perspective, I would prefer to look at ways to buy into those stocks instead.
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