Treasure Chest | Nov 16 2011
By Greg Peel
What?
While not without possible impediments, a full takeover of Forge Group ((FGE)) by 33% owner Clough Ltd ((CLO)) is a possibility DJ Carmicheal finds compelling for a number of clear reasons with the potential for a significant premium to be paid.
Why?
Forge Group provides engineering, construction and maintenance services to the mining and energy sectors in Australia and Ghana. It is 33% owned by Clough – a company of similar profile with exposures in Australia, South-East Asia and the US. Clough recognises the Forge stake in its accounts but is only a beneficiary of the investment through dividends paid. Clough does not, notes stock broker DJ Carmichael, have any access to or enjoy any benefit from the significant cashflows Forge's business generates.
How much might Clough be prepared to pay for these valuable cashflows? Well, DJC estimates that on an enterprise value over earnings basis, Clough is currently trading at a premium to Forge of some 83%. This provides room for Clough to pay a stiff control premium that would still imply significant earnings accretion. And it's not like Clough doesn't have the funds. The company was sitting on $63m in cash at end-FY11 and will be bagging around another $50m once the sale of its marine construction business is settled.
In March this year Forge announced a board and management transition and a new CEO is expected to be announced soon. Over time the outgoing Forge directors have been quietly offloading their shareholdings, as have some early investors, such that the company's share register is now wide open. DJC notes the second largest holding (beyond Clough) is only 3.6%.
All of the above provides reason enough for DJ Carmichael to see a compelling takeover possibility.
Why Not?
DJC also notes, however, some potential impediments. Clough itself is 62% owned by South African construction contractor Murray & Roberts Holdings and that company has been facing some liquidity “issues” of late. Clough's own CEO is also a newbie who took over the office early this month and DJC admits he may not want to entertain such a significant transaction five minutes in.
There have also been rumours Clough itself might be the target of takeover which might then delay any corporate action over Forge.
Either way, DJ Carmichael is content to believe that ultimately something is going to happen, and whatever that something may be it will be beneficial to Forge shareholders.
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