Is Spotless Group Holdings Ltd a takeover target?

Credit: Flazingo Photos

Catering and cleaning services business Spotless Group Holdings Ltd (ASX: SPO) is believed to be on the radar of a potential offshore buyer which may look to take advantage of a languishing share price, together with a weak Australian dollar.

Shares of Spotless Group were floated on the ASX by private equity group Pacific Equity Partners in May 2014 at an issue price of $1.60 and hit a high of $2.51 less than a year later. Since then however, the company’s share price has fallen almost 60% to trade at just $1.02 after hitting an all-time low of 94.5 cents during yesterday’s session.

The sharp decline has largely come as a result of a shocking trading update in December which noted that profit growth from new business wins had slowed. Group earnings before interest, tax, depreciation and amortisation (EBITDA) are tipped to remain flat for the 2016 financial year while net profit after tax (NPAT) is tipped to fall 10% as a consequence.

According to The Australian Financial Review, some analysts now believe that the company’s shares are undervalued and could thus be looked at more closely by cashed-up foreign buyers. The board is reportedly yet to be formally approached but with the weak Australian dollar making it an even more attractive prospect for an international party, it does seem feasible.

The collapse of Spotless Group’s share price coincided closely with that of specialty electronics retailer Dick Smith Holdings Ltd (ASX: DSH), which entered Voluntary Administration this week, leaving many investors with holes in their pockets.

Given their high profile collapses, investors will no doubt approach future private equity sales with a higher level of scepticism. Of course, not every private equity sale is a dud, but investors should pay close attention to overly bullish forecasts and even remain on the sidelines for a while if they’re unsure about something that could become a major issue down the track.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

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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