AMA Group Ltd surges to record high on takeover bid as M&A fever heats up

Shares in AMA Group Ltd (ASX: AMA) surged 5.7% to a record high of $1.20 in early trade after the panel beating and auto accessories group told the market that it has received a bid for part of its business from Blackstone Private Equity.

The private equity group is offering to buy AMA’s panel business for $530 million on a cash-free, debt-free basis but the proposal is non-binding and subject to numerous conditions that include the satisfactory completion of due diligence by the bidder, internal approvals by Blackstone and “agreed transaction structure and documentation”.

What this essentially means is that Blackstone can walk away at any point for any reason and that AMA has to bare its soul to the potential buyer.

You’d be foolish to think this is close to a done deal but the market excitement in the stock is understandable. The indicative price for AMA is close to the market capitalisation for the whole group as AMA was trading at $1.14 yesterday, which values the company at around $590 million.

The panel division generates around 86% of FY17 revenue but if you thought this transaction (assuming it goes thorough) leaves AMA with no future, you’d be mistaken.

I would view the sales of the panel business as a positive for the group as this is actually the key part of the business I am not keen about for the longer term as the impending arrival of self-driving cars (and the fact that many new cars have collision avoidance systems and self-parking features) means we will see far fewer “fender benders”.

Minor accidents account for the vast majority of a panel beaters business, and while this business won’t disappear, it is on a longer-term structural decline.

The sale of AMA’s panel business will also reinforce the value proposition of its recent acquisition of four-wheel drive accessories and services group, Automotive Solutions Group (ASX: 4WD).

AMA bought Automotive Solutions at a bargain price, in my view, by offering 35 cents a share compared to the target’s IPO price of a dollar.

Automotive Solutions issued a number of profit downgrades and its last guidance before being acquired by AMA was for the group to generate an earnings before interest and tax (EBIT) of $1.4-1.5 million.

I have little doubt that AMA’s CEO, Ray Malone, will do a far better job in growing Automotive Solutions given his track record.

Even without the panel business, AMA will have a reasonably dominant position in a few niche markets that can be used as a platform to drive future growth.

The potential transaction is the first notable one this year but we can expect more merger and acquisition activity as conditions are ripe for takeovers.

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