Monday marked a step-up in private equity deal-making after waste management firm Shanks Group confirmed it had received—and rejected—a “highly preliminary and unsolicited ” offer priced at 135p per share, representing a 50% premium to Friday’s closing price. The offer came from an unnamed private equity firm, which was widely rumoured to in fact be US-based Carlyle Group.
However, a 50% premium is apparently not enough to put smiles on the faces of Shanks management. After “supportive discussions” with its two largest shareholders—Legal & General and Schroders, according to Hemscott data, with respective stakes of 16% and 14% each—Shanks said it believes a cash offer of 150p or more would deliver appropriate value to shareholders.
A whopping 70% premium to Friday’s 90p closing price may seem a tad optimistic at first glance but at 7.1 times earnings before interest, taxation, depreciation and amortisation (EBITDA) it would still be roughly 30% lower than the valuations achieved by peers Biffa and Cory when they were taken over by private equity firms in recent years. Biffa, which in April 2008 was bought out by Montagu Private Equity and Global Infrastructure Partners, the latter being the recent buyer of Gatwick Airport, achieved a £1.2 billion price tag that valued the waste company at approximately 10 times EBITDA. Furthermore, with Shanks’ two largest shareholders accounting for just over 30% of the company, any increased bid price is going to need to please at least one of them, if not both, to stand a chance of sealing a deal.
Shanks’ strategy of reducing debt and focusing on recycling and organic waste appears to have paid off. The group slashed its core net debt to £198 million as at the end of September 2009 from £290 million end-March, with the help of a rights issue and asset sales. “We’ve been wondering for some time whether the business was being set up to attract buyers,” commented an internal source on Monday who did not wish to be named. “New managers were being brought in who didn’t necessarily have specific industry experience but who instead focussed very much on efficiency and good management,” he added.
And with the shares today broadly holding on to the previous session’s 43% surge, sliding just 1p to 127.5p by midday Tuesday, there appears to be a broad-based belief that the company will secure its desired price tag, whether as a result of an increased bid from the private equity firm in question or from attracting counterbids from either other private equity players or trade bidders.
Nick Spoliar, analyst at Altium Securities, commented following Shanks’ announcement that as a take-out price, 150p per share is a “highly plausible platform.” Noting managements’ accompanying statement yesterday that it remains confident in its future prospects, Spoliar repeated his Buy advice and raised the price target to 135p from 110p previously. “However it is clear that further newsflow on the M&A front could generate a higher target price if a strategic premium is included (and bearing in mind the much higher valuations at which these stocks have changed hands in recent years),” he wrote in a note to clients Monday.
Charles Pick of FinnCap said Shanks indicating that it would be prepared to accept a cash offer of 150p suggests the private equity party is of heavyweight and highly serious status. He added that the offer is opportunistic in the sense that Shanks is not badly managed. “It has suffered because GDP weakness leads to weaker waste production levels and this has been especially true of its largest business in Holland,” Pick said. The analyst also noted that rival names likely to be brought into the frame include France’s Suez Environnement and Veolia Environnement, British firm Pennon, and WRG, which is owned by FCC of Spain.
FinnCap recommended investors hold the Shanks shares and “enjoy the ride!”
