Investment Matters


What happened this week

Cardno received a partial takeover offer - $3.15 per share for one of every two shares a shareholder owns.  The offer was made by a private equity player - Crescent Capital, who already owns 19.62% of the company.

Should Crescent achieve full acceptance of 1 in every 2 shares (excluding those it already owns) it would own 58.9% of the company.  This would give it control, but the company would remain ASX listed.  Even without full acceptance, there is a good probability of Crescent getting a 50% controlling stake.

Private equity has a reputation for buy, pull the business apart, sell pieces for more than purchase price, or buy, clean out, implement cost savings and efficiency measures, gear up and sell / re-list.  But not all private equity operates this way.

Some private equity players do see the value opportunity at acquisition, and go on to improve, build and invest in the businesses they acquire.  After increasing the value of a business, they then sell or re-list to realise profit from 1. having acquired the business cheaply in the first instance, and 2. having grown the underlying value of the business since acquisition.

Crescent is considered to be in the latter category.

Why not a full takeover offer?  Cardno has high employee share ownership. Retaining this share ownership will allow employees to remain engaged and aligned through Crescent's involvement.  We also think that Crescent will be able to achieve its objectives without having to go through a full takeover.

Our position

First Samuel’s clients have invested in Cardno (having bought and sold a few times and to various degrees) over a number of years.  Given dividends received (dividends have been many and strong), and the timing of buys and sells, it has actually achieved a positive, albeit nominal absolute return, for most clients. However, the share price has, without doubt, been disappointing over the last 12 months.

The downturn in infrastructure spending, and mining related activity in Australia, along with pressure in the US oil and gas sector, has impacted demand for Cardno's services.  However, with revenues in FY15 of $1.4bill - versus $1.3bill in FY14 (+$100mill!) - the bigger picture issue has actually been an increase in costs (EBITDA fell $33mill over the same period).  It is clear that the business has been underperforming operationally, and to our annoyance, has entered this more difficult economic time with more debt than we would prefer.   (If it had low debt right now, it's options would be better.)

This has been compounded by serial executive change (3 CEO’s and 2 CFO’s) over this time, which has left the market and casual observers understandably unsure about the company's future prospects.

This largely self-created (in our opinion) appearance of distress has created the perfect environment for a smart predator to strike, at a cheeky price, which Crescent has done.

Therefore, whilst in principal we are relaxed about Crescent taking control of the business, we do not see the offer price as very unattractive.

Cardno, in our opinion, needs Board renewal, and a strategic and (particularly) operational re-focus.  Cardno's new CEO has started down this path - but Crescent can drive and motivate, decrease the timeframe for implementation, and bring additional expertise and opportunities to the fore.  To this end, Crescent has articulated an intention to have Board representation.

Cardno is, at its heart, a good business.  We would be comfortable being a minority shareholder to Crescent, and look forward to Crescent being able to achieve the objectives it has articulated.  This would be in the interests of First Samuel clients as well.

Parallels with Energy Developments

We see parallels with our involvement with Energy Developments and Pacific Equity Partners (PEP).  We were comfortable with being a minority shareholder of Energy Developments, with a controlling interest being acquired by PEP.  It must be admitted we weren't too happy in the first instance when dividends were cut! But then we could see that this was key in allowing reinvestment and growth of the ENE business, so did become supportive of this.

Overall, we viewed PEP's involvement in Energy Developments as an opportunity that, we assess, added value.  PEP invested in and grew the business through its ownership, and kept the Managing Director in place.   This benefited First Samuel clients.

W&D has discussed the outcome of the Energy Developments investment (see W&D #4 of FY-16), but just a quick recap: We initially invested in Energy Developments in 2007.  The majority of shares were acquired in CY-07 and CY-08 for a weighted average price of $2.68 per share.  In late 2009, ENE received a takeover offer from PEP.  We assessed that the bid, which was made final at $2.75 per share, substantially undervalued the company.   We remained as a minority shareholder to PEP.  Energy Developments received a takeover offer from DUET in Jul-15 at $8.00 per share, which is likely to be implemented at the end of October.  All this culminated in an average annualised return of 18.5% over the time we owned Energy Developments to 30-Jun-15.  With a share price of $7.30 at close 30-Jun-15, an additional return of 9.6% should be realised this financial year.




Although we see parallels with Energy Developments, that does not necessarily mean that the future will play out in the same manner (in either the short or long term).  Different options exist as to 'how we will play our hand' - to realise the value we believe exists.  Furthermore, different scenarios exist as to how the future of the company could play out, for instance takeover or part sale.

We will, obviously, keep you up to date as events occur.