JBS offer for control of Scott Technology beats independent value, lags behind market price
Brazilian meat processor JBS's $1.39 a share offer to buy at least half of local robotics manufacturer Scott Technology [NZX: SCT] is a premium to the valuation settled on by an independent adviser but falls short of the current market price.
Scott's board is endorsing a bid by JBS Australia, an existing Scott customer, which wants to merge with the Dunedin-based company through a scheme of arrangement, buying 10 million shares at $1.39 apiece and offering to buy out existing investors at the same price.
That would be followed by a one-for-eight non-renounceable rights issue at $1.39 for shareholders who didn't want to be diluted, then a further placement to give JBS 50.1% of the company.
The offer price is a premium to the valuation ascribed to Scott by independent adviser Northington Partners of between $1.08 and $1.26, and that the JBS offer is "fully priced."
However, in saying that, the Northington report acknowledges the price is below the market value of the shares, which have traded consistently higher over the past two to three years.
"We are confident that our value range appropriately considers Scott's recent performance and future prospects and therefore represents a reliable assessment of the intrinsic value of the business," the report says. "Based on the evidence, we certainly cannot justify the observed market values on a valuation fundamentals basis."
The shares slipped 0.7% to $1.50 today, having rallied from $1.33 they were trading at before the upcoming JBS deal was announced.
Illiquid market for shares
Northington says the shares have been traditionally illiquid and their decline since early 2014 coincides with a sharp slowdown in the mining sector weighing on Scott's margins and earnings.
"We believe that a maintainable ebitda (earnings before interest, tax, depreciation and amortisation) range of $9 million-$9.5 million provides a reasonable balance between the impact of difficult trading conditions that are expected to continue in appliances and mining, and the upside that may be delivered by both the full integration of recently acquired businesses and the lower currency," the report says.
"This level of earnings is higher than historical performance, is materially higher than our estimate of full year normalised earnings for FY2015 ($8 million-$8.5 million), and in our view therefore incorporates reasonable allowance for the earnings improvement that Scott is targeting in the short term."
Earlier this month, Scott reported a doubling in annual profit as it benefited from a weaker currency and the gains from its RobotWorx acquisition. The company's series of acquisitions in recent years increased its debt levels and the merger deal with JBS was seen as a better alternative to a capital raising.
The Northington report says the deal is "relatively complicated" in that shareholders will have to decide on whether to approve the merger, sell their shares, or participate in the rights issue.
"In our view, Scott will continue to face significant challenges if the business continues under its current structure," the report says.
"While the earnings volatility from Scott's traditional product lines (particularly the appliances business) may be partially offset by contributions from recent acquisitions, further structural changes may be needed to put the company into a position where it can support sustainable improvements in financial performance."
Shareholders will vote on the merger at a special meeting on November 26.
If JBS is successful in acquiring control of Scott, it will seek appropriate board representation, and introduce the Dunedin company's technology across its global group. It will also provide additional capital to support Scott's growth, but has no intentions of making material changes to the company.