Programmed chairman Bruce Brook dangles merger carrot to Skilled Group

Ready to talk: Programmed chairman Bruce Brook, left, says the position of CEO in any merged entity – previously earmarked for Chris Sutherland, right – was ‘up for discussion’. Photo: Pat ScalaProgrammed Maintenance Services chairman Bruce Brook has implored Skilled Group to engage with his merger proposal and hinted at a concession about who would fill the chief executive and chairman’s roles in a new entity.
Wuxi Plastic Surgery

Mr Brook has not spoken to Skilled chairman Vickki McFadden since a courtesy call regarding Programmed’s “merger of equals” proposal letter sent to Ms McFadden on December 17.

Under the proposal both sets of shareholders would own 50 per cent of a combined entity worth about $700 million. Skilled shareholders would receive 0.5032 Programmed shares and 25¢ for every Skilled share.

“I really want to implement the discussion. We think this is the best and most value accretive opportunity for us and for Skilled,” Mr Brook said.

“I have attempted to speak [to Ms McFadden] subsequently. But, probably for good tactical reasons, our correspondence has been by email. If their chair wanted to call me I’d pick up the phone any time.”

When the offer became public on December 29, Skilled responded with a short statement saying the offer was “opportunistically timed” because of its recent share price weakness.

Skilled said it is assessing the proposal and there is no certainty of a deal being completed when it does respond.

Mr Brook, who also serves on the boards of CSL and American gold giant Newmont, said all companies try to make sensible strategic moves and the term “opportunistic” is hackneyed.

“I can’t think of any offer, no matter how reasonable, that the target hasn’t said is opportunistic and low ball. This merger is value accretive to shareholders, and it reduces risk,” he said.

Programmed said in the merger letter that its chief executive Chris Sutherland would serve as CEO of the combined business and that the new board would include “significant representation” from Skilled directors.

The management team would be comprised of executives from both companies on a “best for job” basis.

Mr Brook said the CEO position, chairmanship, and board composition are all up for discussion with Skilled.

“Absolutely all of those things are up for discussion. We would not want those matters to stand in the way of a really accretive merger,” he said. “We think Chris is the logical person … [but] that would be a topic for negotiation.”

Skilled is in the middle of a CEO transition and on Monday said new boss Angus McKay would start immediately, two weeks earlier than planned, so he could “participate in the detailed review of the unsolicited, conditional, and opportunistic proposal put to the company by Programmed”.

The two companies have held on-and-off discussions about a merger several times over the years. The companies came close to doing a deal in the middle of 2014 but talks fell apart over how synergies should be shared.

Programmed CEO Chris Sutherland said he has previously engaged with Skilled management on synergies and he is “very confident” that $20 million of synergies could be realised in a merger.

He said the merged company would have a database of 1 million people, allowing the right person to be matched with the right job very effectively. He said the diversified earnings of a merged group would reduce risk and could lead to a share price re-rating.

Skilled and Programmed both have big exposures to the mining and oil and gas industries, which are under pressure from falling commodity prices.

“Scale is very important with pressure from large customers coming on…we need to manage our [earnings] volatility,” said Mr Sutherland, who is an engineer with past oil and gas experience at Clough and WorleyParsons.

He said that based on current share prices both companies are being valued at similar enterprise value multiples.

“We are proposing a true merger,” he said. “No one is questioning the industrial logic. The valuation of both companies is similar. The idea is to put the two companies together and make one plus one equal three.”

But Celeste Funds Management chief investment officer Frank Villante said the difference in the earnings bases of both companies makes it difficult to talk about a merger of equals.

“We don’t need a deal to get over the line,” he said. “We are happy with our Skilled shareholding. Sure synergies are attractive but synergies often don’t pan out as people expect.”

Celeste owns 7.5 per cent of Skilled but is not an investor in Programmed.

Mr Villante said Programmed’s offer of cash as well as shares implies recognition this is not a merger of equals.

Mr Brook described the 25¢ cash as “a sweetener” for an offer already “marginally on the generous side”.

“It is very easy to say ‘increase the sweetener’ but the merged company will be saddled with the debt and it is risky times with unexpected outcomes from the oil shock,” Mr Brook said.

Mr Sutherland said that six weeks after he started as Programmed CEO the 2008 financial crisis hit. “We had $235 million of debt. I’ve been cautious about debt ever since,” he said.

He also said he is calm about the oil price collapse because energy demand is rising and he believes oil and gas exploration will continue. He is confident the long-term contracts in the property and infrastructure sectors give Programmed earnings stability.

Programmed is currently eyeing $3 billion worth of work associated with new infrastructure projects, including five public private partnerships.

In December Programmed won a $270 million, 39-year contract to provide maintenance services to student accommodation at the University of Wollongong. The company is also bidding alongside Decmil to build eight new schools in Western Australia.

The original release of this article first appeared on the website of Wuxi Plastic Surgery Hospital.

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