It is probable the takeover of Coffey by Tetra Tech will proceed as it is likely the minimum acceptance condition of 90% will be met. However this is not guaranteed and the offer remains conditional
As of 7 January Coffey stated it has received offers totalling 83.62% of shares. Further to this Coffey’s management hold in excess of 10% of shares taking the total above the 90% minimum set for the takeover.
Offers by shareholders to sell their holdings do not at this stage constitute formal acceptance of the offer by Tetra Tech. Tetra Tech needs to give formal written notice that it has declared the offer free from all defeating conditions (fulfilled or waived).
Timing
- The offer has been extended multiple times and currently closes on 29 January 2016
- Tetra Tech can declare the offer unconditional at any time up to that date, or could extend it
- The change of control condition will be triggered once settlement of the takeover has occurred. This occurs at the earlier of: a) 30 days after the bid goes unconditional or; b) 21 days after the end of the offer period
- The change of control is optional for bondholders
- Within 30 days of a change of control event the issuer must notify the bond trustee and advise of a redemption date (between 30 to 50 days from the notice) and how to accept the offer
Combined entity
Coffey would become part owned by a much stronger entity. Tetra Tech is a large global US provider of consulting, engineering, program management and construction management services. It has a market cap of US$1.57bn, FY14 revenues of US$2.5bn and 13,000 employees. Tetra Tech has a very solid credit profile with strong cash generation, very low debt and significant liquidity. Its interest coverage is over 20x in FY14 and leverage of only 0.53x.
Following is a summary of Tetra Tech’s financial position:
| USD | FY14 |
|
Revenue
|
$2,483.8m
|
|
EBITDA
|
$208.4m
|
|
Interest
|
$9.5m
|
|
Net debt
|
$81m
|
| Liquidity |
|
Cash
|
$122.4m
|
|
Available lines of credit
|
$458.8m
|
| Leverage |
|
EBITDA/Interest
|
20.24x
|
|
Net debt/EBITDA
|
0.53x
|
| Gearing |
|
Total debt/Total capital
|
16.75%
|
|
Net debt/Total capital
|
6.69%
|
- We do however note there will not be an explicit guarantee from Tetra Tech to Coffey, meaning the company is not directly liability for Coffey’s commitments. However it is likely financial support will be available given the $109m cash equity investment with the knowledge of Coffey’s current liabilities
- It is unknown what Tetra Tech’s intention is regarding Coffey’s current bank and bond debt. Tetra Tech is flush with cash (USD122.4m) and has additional lines of credit totaling USD458.8m
- The company therefore has more than enough capacity to pay out the debts and an economic incentive to do so given it can borrow funds at much lower rates than Coffey. According to its SEC filing Tetra Tech can borrow at an Australian rate equivalent of +100-250 basis points (bps)
Options for bondholders if the takeover is completed
- Bondholders have the option under the change of control condition to sell their notes back to the company at 101% of face value plus accrued interest.
- Bondholders can continue to hold the notes which have a first call date of September 2017 at 103% or September 2018 at 101.5% of par before maturity in September 2019.
- The issuer may purchase the bonds in the open market at any time or by other means such as a tender offer to bondholders and at any price. Given Tetra Tech can borrow substantially cheaper than Coffey’s bond margin of 465bps it has an economic incentive to buy back the more expensive bonds. This means there is a possibility a premium may be offered if the group seeks to payout the bonds prior to the first call.
Please note that while it is considered likely the deal will proceed, it is not guaranteed and is still conditional. Bondholders should refer to previous notes for a discussion of various possible scenarios and background on the transaction.