PEP Baulks at Raising Spotless Bid

Australian private equity firm Pacific Equity Partners on Tuesday baulked at sweetening its A$711 ($730 million) offer for cleaning services company Spotless Group, raising the prospect it could walk away from the bid, writes Reuters. Spotless said on Monday it would recommend an offer from PEP and allow due diligence only if the buyout firm raised its offer to at least A$2.80 per share, or A$743 million ($760 million).

(Reuters) – Australian private equity firm Pacific Equity Partners (PEP) on Tuesday baulked at sweetening its A$711 ($730 million) offer for cleaning services company Spotless Group, raising the prospect it could walk away from the bid.

Spotless took the unusual step on Monday of saying it would recommend an offer from PEP and allow due diligence only if the buyout firm raised its offer to at least A$2.80 per share, or A$743 million ($760 million).

But PEP, Australia’s biggest buyout firm, said it could not raise its offer without seeing the company’s books. The bid of A$2.68 per share implied a multiple of 16.5 times forecast 2012 earnings, above the average of comparable companies of 10.2 times earnings, it said.

In a management presentation to PEP on Dec. 21, Spotless said it expects to achieve double-digit earnings growth over the next four years, through winning more and bigger contracts as companies outsource facility services.

“While the (Spotless) management presentation clarified certain high level assumptions, there was no information provided that would justify a valuation above our revised proposal of $2.68,” PEP said in a statement.

PEP said it has shareholder support representing 26 percent of Spotless’s issued capital.

“We are just flabbergasted we are in this position in the first instance. It is incredibly unfortunate,” said Simon Mawhinney, senior portfolio manager at Orbis Investment Management, which holds 8.45 percent of Spotless and supports the PEP offer.

“I think PEP will ultimately walk away actually,” he said.

SECOND REBUFF?

If PEP does abandon its bid, it would be the second time in a year that Spotless has rejected private equity bids without putting the offers before shareholders. It rebuffed Blackstone last May.

Spotless is tightly held, with five institutions owning 40.5 percent of its issued capital.

Analysts said if the board continued to block PEP, the larger shareholders could call an extraordinary general meeting to question management on its tactics.

Mawhinney said Orbis had not yet been in touch with other large shareholders but would consider its position in coming days.

Spotless, which provides services including cleaning, security and catering, is best known for its catering contract for selling meat pies at the Melbourne Cricket Ground.

Private equity firms have been very active in Australia in recent months, taking advantage of market turmoil and weak growth in the non-mining parts of the economy.

Pacific Equity Partners said its offer — already hiked once from A$698 million — was highly attractive.

Its comments sent Spotless shares down 5.1 percent to A$2.25 initially. They later trimmed losses to close down 0.8 percent.