Wednesday 22 March 2017 by William Arnold Company updates

Downer makes offer for Spotless Group – ratings affirmed but leverage to increase

Downer has made an offer for Spotless Group of around $1.3bn, supported by a $1bn fully underwritten rights issue and debt

Downer has made an offer for Spotless Group of around $1.3bn, supported by a $1bn fully underwritten rights issue and debt. With the inclusion of Spotless’ $848m of net debt, leverage will increase. Further, ratings agency Fitch has confirmed Downer’s credit rating however state that if leverage is not reduced sufficiently by FY19 it may downgrade the group.

The transaction will increase scale and diversification, and give Downer an increased proportion of stable revenues.

Key points:

  • Offer: After accumulating a 19.99% stake in Spotless, Downer announced a takeover offer of $1.15 per share. The offer price represents a 59% premium to Spotless’ closing price on 20 March, a 26% premium to the average share price calendar year to date.
  • Rationale: Increases proportion of earnings to more stable services which has long term contracts and a diversified customer base, compared to mining services.
  • Synergies: Downer estimates pre-tax cost synergies of $20m in FY17, and $20-$40m over time.
  • Funding: Total cost is expected to be around $1.3bn, which Downer intends to fund with a $1bn fully underwritten rights issue, and the remainder with debt. Downer also intends to refinance Spotless's net debt of $848m (31 December 2016).
  • Credit metrics: Leverage will increase following the acquisition. Downer estimates proforma net debt/EBITDA of ~1.5x and proforma gearing of ~28%. This is in comparison to Downer’s standalone net debt/LTM EBITDA of 0.04x and gearing of 6.4% at 31 December 2016.

Fitch expects its leverage measure (adjusted net debt to operating EBITDAR) to rise to 2.8x at end June 2017, and improve in FY18 before returning to below 2.5x. Fitch states it could consider negative rating action by FY19 if this level is not met.

No due diligence: We note that Downer will not be granted due diligence and will rely on public information.

Please refer to Fitch’s media release forExternal link - opens in a new window more details.