In morning trade, the testing services company's shares jumped a further 10% to 16.5 cents.

When the HRL share price reached that level, it had doubled in value over the last two trading sessions.

Why is the HRL share price surging higher?

Investors have been bidding the HRL share price higher today after the company announced an agreement with industry giant ALS Ltd (ASX: ALQ) regarding a takeover.

According to the release, the two parties have entered into a bid implementation agreement under which ALS will acquire all of the HRL shares it does not already own by way of an off-market takeover at 16 cents cash per share.

This follows yesterday's announcement, which revealed that ALS had tabled an unsolicited, non-binding indicative offer.

The two parties have also agreed to a deal protection regime that includes no shop and no talk rights. Furthermore, ALS has a right to match any superior offers and HRL has agreed a break fee of $800,000.

'A very good outcome' for shareholders

The HRL board is advising shareholders to accept the offer, subject to there being no greater offer made from a third party.

HRL's non-executive chair, Greg Kilmister, believes the offer is a very good outcome for shareholders. He commented:

The HRL Board is unanimous in its view that this transaction is in the best interests of HRL shareholders. In making this assessment, the Board has carefully considered a range of matters including its view of the intrinsic value of HRL taking into account the company's current position and future prospects, and the certainty for shareholders of this all-cash offer. We believe this transaction is a very good outcome for HRL's shareholders, and for stakeholders more broadly, including our customers, staff and suppliers.

The post HRL share price jumps 10% as board backs takeover from ALS appeared first on The Motley Fool Australia.

Which is what we're seeing today after it was revealed that ASX 200 share ALS Ltd (ASX: ALQ) – a global inspection and certification business – made such a takeover bid for HRL Holdings Ltd (ASX: HRL) on 30 May.

HRL, a small-cap laboratory service provider, said negotiations remain under discussion.

What is the ASX 200 share offering?

According to this morning's release, ALS pitched an unsolicited, non-binding indicative offer to acquire 100% of its smaller rival's shares for 16 cents cash per share.

That's a massive premium to yesterday's closing price of 8.2 cents. And investors took note, driving the HRL share price up to 14 cents, a gain of 70.8% today.

With 494.38 million shares outstanding, the ALS bid values HRL at just over $79 million.

However, the deal isn't done yet.

HRL stressed that discussions on the takeover offer are "preliminary and incomplete and no agreement has been reached in relation to any transaction". It said there are no guarantees that the two parties would reach an agreement and that a transaction will eventuate.

HRL said that following the takeover offer from ALS, it entered into a Process Deed on 7 June 2022. This gives the ASX 200 share the opportunity to undertake due diligence and negotiate transaction documentation on an exclusive basis to 20 July 2022.

The Board said shareholders didn't need to take any action regarding the ALS proposal. Shareholders will be informed of developments.

ALS is being advised by Highbury Partnership and Baker & McKenzie.

McCullough Robertson is acting as the legal adviser for HRL.

How have these 2 companies been tracking?

With today's huge 71% intraday leap factored in, the HRL share price is up 17% year-to-date.

Investors have responded less enthusiastically to the ASX 200 share making the takeover offer. The ALS share price is down 2% today, putting it down 18% for the calendar year.

By comparison, the ASX 200 is down 11% in 2022.

The post Guess which small-cap company is soaring 71% on a takeover bid from an ASX 200 share appeared first on The Motley Fool Australia.

If you could see how it could grow as big as the larger competitor, would you be tempted to buy in?

NovaPort Capital analyst Tim Binsted is certainly excited when he's fishing for small-cap "tiddlers that can grow into tomorrow's whales".

And he reckons he's just caught one.

"Laboratory and environmental services business HRL Holdings Ltd (ASX: HRL) is capitalised at just over $55 million and the journey of ASX-listed peer ALS Ltd (ASX: ALQ) — capitalised at more than $6 billion — gives some indication of the market opportunity."

A small-cap that's already profitable

A major upside of HRL, according to Binsted, is that it's in the black already.

"Unlike many early-stage businesses, HRL is already profitable," he said on the NovaPort blog.

"This meets a key criterion that NovaPort Capital looks for in emerging companies: cashflows that can fund growth without the downside risk associated with many high-growth, high cash-burn businesses."

Binsted showed a comparison of underlying earnings margins of HRL and its competitors, which showed it ranked 3rd in a field of 9.

"HRL generates margins that are very healthy when judged against a peer set of much larger businesses."

The business also has "a strong balance sheet with negligible debt", according to Binsted.

3 paths to growth

Binsted's team thinks HRL's testing capabilities in food and water quality and environmental hazards put it in an excellent position for growth.

There are 3 ways that it could grow:

• Investment in existing operations (new tests, equipment upgrade, new regions)
• Bolt-on acquisitions to expand services or customer demographics
• 'Transformational' acquisition for rapid expansion

According to Binsted, HRL is pursuing all 3 avenues.

"The recent acquisition of Water Testing Hawkes Bay in New Zealand, while small, demonstrates the capacity to continually expand the group's testing lines," he said.

"HRL is also investing in a joint venture with Milk Test NZ called Food Lab that has just commenced trading and will begin with a focus on the NZ dairy industry."

HRL leadership estimate Food Lab's addressable market is about NZ$40 million, to be fought over with 2 main competitors.

"Snaring a third of this market would be material given HRL's current revenues of around $35 million."

As for that massive transformational takeover, the chair of HRL is a man named Greg Kilmister.

"Kilmister was the chief executive of ALS Limited and took the business from a market cap of less than $400 million to more than $3 billion," said Binsted.

"That's the kind of steady hand that provides comfort in any big strategic moves or tough patches."

HRL has a clear plan

Binsted was impressed that HRL presented a very precise 3-year plan for growth during its recent financial year 2021 results announcement.

"This will require reinvestment, but we are willing to back management to use shareholder capital wisely and drive value-accretive growth."

The company has a software arm called Octfolio which Binsted's team thinks has tremendous potential.

"Octfolio's hazardous materials, workplace safety, and field management software generates just under $1 million in revenue. At that size, it has proof of concept and customer validation but is immaterial to earnings and valuation," the analyst said.

"With a re-energised sales focus, Octfolio could become a significant, and high value, revenue stream. Its current contribution is not valued by the market, so the upside is large relative to any downside."

Small-cap risk

Of course, Binsted reminded investors that no ASX share is a sure thing.

"Growth is not a right and markets are competitive. There are no guarantees that HRL's organic investment drive will bear fruit," he said.

"It is also possible that the share price will suffer near-term as the growth initiatives crimp current earnings ahead of any potential revenue growth."

HRL currently operates in "a comfortable niche", but desperately needs economies of scale to elevate to the next level.

"Failure to get to scale or a misguided acquisition in the quest to bulk up are 2 further risks to our investment thesis."

The post Why this small-cap ASX share can follow $6 billion rival appeared first on The Motley Fool Australia.

At the time of writing, HRL Holdings shares are up 20.69% to 10.5 cents in late afternoon trade. With this rise, the company's market capitalisation currently stands at around $52 million.

HRL Holdings provides sampling, laboratory testing and data management services across Australia and New Zealand.

The company's customer base comprises companies within the food, environmental, occupational hygiene and construction industries.

FY20 guidance

HRL's guidance update is likely what has been spiking investor interest today. Although HRL noted that future mid-term activity levels remain difficult to accurately predict, it provided an update on its current financial performance.

The company expects FY20 revenue to land in the range of $32 million to $32.7 million, up from FY19's revenue result of $30.7 million. 

Meanwhile, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to be between $5.5 million and $5.8 million, up from $4.5 million in FY19. HRL was quick to point out that analyst consensus of underlying EBITDA is $4.8 million.

Trading update

Along with the guidance, HRL also shed light on recent trading conditions.

As previously announced, the company's New Zealand business has been impacted by the nationwide lockdowns. During alert level 4 which was in place from late March through to late April, only HRL's food and water testing laboratory operations were permitted to remain open.

However, all New Zealand operations recommenced in mid-May when restrictions were relaxed to alert level 2. The company stated that trading is improving but still below pre-COVID-19 volumes.

On a positive note, HRL's Australian businesses continued to trade without interruption during April and May.

On the whole, HRL noted that fourth quarter trading conditions benefited from the company's ability to operate "essential services" food testing for honey and dairy, combined with a strict cost control strategy that has been executed across the business.

In terms of cash, operating cashflows over the second half of FY20 have been positive and HRL stated it remains "significantly" within banking covenants.

The post HRL Holdings share price flies 20% on consensus-beating earnings guidance appeared first on The Motley Fool Australia.