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Round 2 of takeover of AMA Group Ltd (ASX:AMA) may be about to begin

M&A Letters

The acquisition game between private equity group Blackstone and AMA Group Ltd (ASX: AMA) may not be over, according to at least one broker.

The market is giving some weight to the theory it seems with the share price of AMA Group jumping 2.1% to 98 cents this morning when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is down 0.3%.

This marks a reversal in sentiment after AMA Group told investors on Friday that the $508 million deal, which will see Blackstone acquire its panel beating business, has been scrapped due to a negative tax ruling on the transaction by the Australian Tax Office (ATO).

The Australia Financial Review reported that Bell Potter is speculating that Blackstone could now be mulling a full takeover bid for AMA Group as that would allow the bidder to acquire the assets and bypass the tax issue that would otherwise erode most of the value of the transaction.

It’s not a crazy notion in this environment as bidders are actively seeking deals on the ASX. You only need to look at the recent string of acquisitions on the market involving outdoor advertising group HT&E Ltd (ASX: HT1), IT consultancy DWS Ltd (ASX: DWS), logistics software company WiseTech Global Ltd (ASX: WTC) and miner South32 Ltd (ASX: S32) – just to name a few transactions.

Companies are cashed up and risk appetite is strong. This is a great time for mergers and acquisitions (M&A), so AMA Group is probably still in play in some shape or form.

Blackstone may decide it’s easier to just swallow the whole company given that AMA’s panel beating division generates 90% of its earnings, noted Bell Potter. The rest of the businesses could be on-sold to other interested parties.

The thing that could stop a full takeover of AMA Group is that such a move will push capital gains liability onto its shareholders. I don’t necessarily see this as a bad thing if enough of a premium can be offered for the stock. After all, this is how a lot of other M&As are completed.

But Bell Potter thinks even if a full bid doesn’t materialise, AMA Group could still ink a deal to provide procurement services to Blackstone’s panel beating division.

“There still may be potential for AMA to provide procurement services to the panel businesses of Blackstone (e.g. Service King) which would provide some earnings upside,” said the broker which has a “buy” recommendation on the stock with a price target of $1.25 a share.

“Such an agreement was reached as part of the proposed transaction and included a first-year minimum fee which was forecast to generate EBITDA [earnings before interest, tax, depreciation and amortisation] of about $7 million.”

This could be the time to buy the stock given that AMA Group is underperforming the broader market with a loss of over 1% when the top 200 stock benchmark is up by over 8%.

Its undemanding valuation, strong management and M&A appeal could see the stock rebound in the new financial year.

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Motley Fool contributor Brendon Lau owns shares of South32 Ltd. The Motley Fool Australia owns shares of WiseTech Global. 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 Scott Phillips.

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