Australia | Jun 28 2007
By Chris Shaw
Media speculation as to the growth options Transfield Services (TSE) is considering have resulted in the company confessing it has approached GRD (GRD) with a conditional offer to acquire that company at between $2.70-$2.75 per share.
News of the approach sent GRD shares as high as $2.90 in yesterday’s trading, while sending analysts to their company models to assess whether or not the deal would be a good one for Transfield.
JP Morgan says not really, suggesting any such acquisition would increase the strategic and operating risk profile of the company and result in it trading on a lower earnings multiple than is currently the case as the market would have questions as to its strategy with respect to future acquisitions.
The broker also suggests going ahead with the deal, which values GRD at between $510-$520m, may create an overhang in the market as it is likely Transfield would need to make an equity issue to raise the necessary funds. The clincher though is the acquisition price is not particularly cheap, the broker estimating it values GRD at around 15x FY07 earnings, though there is scope for this to be reduced by selling the waste management business.
Factoring all this in has seen the broker cut its price target on the stock to $10.50 from $11.35, though it continues to rate the shares as Neutral.
Citi also regards the proposed deal as slightly negative overall, even though on its estimates it is likely to prove mildly earnings accretive. It too expects Transfield would on-sell the global renewables assets as its primary interest would be the Minproc division, which would fit in with its existing operations. It suggests adding Minproc to Transfield’s existing operations would likely generate some operating and cost synergies.
The broker’s analysis also agrees with the JP Morgan view a bid could require additional equity, as on its numbers the company has around $180m available now and as much as $350m leading into FY08 but a GRD acquisition at the prices indicated implies a valuation well in excess of this amount.
UBS has also weighed in with its view on any deal, suggesting simply it didn’t see the proposal as likely to proceed. While agreeing the Minproc operations would be the area of interest, the broker points out its operations are in regions where Transfield has little or no presence, which limits the potential for generating synergies.
Given it doesn’t see the deal as going ahead it suggests any weakness in the Transfield share price as a result of the deal speculation should be viewed as a buying opportunity, the broker maintaining its Buy 1 rating and price target of $13.00.
Overall the FNArena database shows Transfield rated as Buy four times, Accumulate once and Hold twice with an average price target of $12.77. Shares in Transfield today are stronger and at 2.45pm the stock was up 39c at $11.14.