Two ASX mining shares seek to join forces as Perenti Ltd (ASX: PRN) plans to acquire 100% of DDH1 Ltd (ASX: DDH).
Surprisingly, the market has reacted negatively to the Perenti share price following the scheme of arrangement announcement. Shares in the larger mining services contractor are down 8.2% to $1.17, while the smaller drilling company, DDH1, trades up 7.9% to 93 cents apiece.
The proposed deal would establish an ASX-listed mining services company with a combined market capitalisation of $1.3 billion.
What's the sales pitch for merging?
Entering into a binding scheme implementation agreement, DDH1 shareholders are expected to receive 12.38 cents in cash alongside 0.7111 Perenti shares per DDH1 share. The offer values the Australian drilling company at an equity value of $410 million.
Before the market opened, Perenti detailed the compelling proposition to merge with DDH1 in a presentation to investors. The main strategic points for undertaking the merger were highlighted as being:
- Synergies: estimated $22 million in post-tax synergies
- Earnings: double-digit earnings accretive
- Scale: creating a global leader in mining services, unlocking the potential for S&P/ASX 200 Index (ASX: XJO) inclusion
- Increases share of earnings from Australian operations
- Fundamentals: improves the balance sheet, improves free cash flow, and increases return on equity
Commenting on the proposed merger of the two ASX mining shares, Perenti CEO Mark Norwell said:
The long-term outlook for a sustained production cycle needs increased drilling spend to ensure mining reserves are not diminished, and drilling is becoming more complex, resulting in larger programs and demand for specialist services.
DDH1 is a highly respected tier 1 global operator, with significant capabilities across a complete range of specialised surface and underground drilling services, that are complementary to our existing clients and service offering.
Notably, the combination will create a company possessing more than 290 drilling rigs — one of the largest fleets on the planet.
How do past earnings of these ASX mining shares compare?
Perenti generated $55.7 million in profits on $2.7 billion of revenue in the 12 months ending 31 December 2022 — equating to a net income margin of 2.1%. Meanwhile, DDH1 pulled in $44.5 million in earnings on $532.7 million of revenue — coming to a margin of 8.4%.
If the two were already a combined company, it would be trading on a trailing price-to-earnings (P/E) ratio of 11.7. Perenti expects $3.45 billion in FY23 revenue for the combined group.
Finally, October 2023 is the targeted date for the deal to be implemented.
