Cardno: a sensible conclusion and the start of the recovery
This week Crescent Capital increased its proportional bid for Cardno to $3.45 per share, from $3.15 per share. As part of the increase, it was agreed that Cardno would restructure its board should Crescent obtain greater than 30% of the shares on issue through its proportionate offer.
Under the agreement, within three days of Crescent getting greater than 30% shareholding, two current non-executive directors will resign, one new independent director will be appointed and three Crescent nominees will be appointed. After a 3 month transition period, the current chairman and all remaining non-executive directors will resign (at the discretion of Crescent) and new appointees found.
This is a good result for Cardno and therefore its shareholders
Following this period, the board will have eight “new” directors (managing director; four non-executive directors, and three Crescent nominees). Importantly, the early excellent work by new CEO Richard Wankmuller will continue unaffected, and shareholders have the option to sell part of their holding or none of their holding at a "reasonable" price.
This will allow for the upside and true value of Cardno to emerge over coming years (as what happened with Energy Developments).
We see that a degree of “backbone” needs to be brought back to Cardno, and that strong accountability needs to be applied around decision making and group wide decisions. We think a new aligned board has this mandate, and we expect to see more accountability and rigour brought to bear. We are confident that this will result in higher returns for shareholders in due course.
What have we been doing on clients' behalf
We have seen this partial takeover as an opportunity to get clients appropriately positioned for the return to favour of Cardno (in due course). Since the original offer we have doubled our position in Cardno (at prices ~$2.80ps on average), and we intend to accept the offer for 50% of our total stake by Crescent at $3.45ps (ie ~$0.60ps higher than what we have paid in recent times).
This will essentially allow us to have “profited” from the transaction, end up with a similar weight (as we had pre the offer), and benefit from the business' recovery over coming years.
Should we see weakness at the end of this offer, it may represent a great opportunity to pick up further shares on the cheap. We shall see what other shareholders elect to do and how the business performs in the short term.
In the short term more work is required, in the medium term we see substantial upside
In the short term, the reality is that Cardno is underperforming operationally. It needs to see a range of efficiencies introduced, a tightening around the range of businesses that it operates and a less geared balance sheet (i.e. to reduce debt levels somewhat). We see all these things as being achievable (in several different ways) and expect that Crescent (and Richard Wankmueller as CEO) will be able to get on and rectify these things now, post haste.
Once all the changes occur (the next six months are key), as we intimated in last weeks W&D, we would value Cardno at greater than $5.00ps, considerably above the current price (and offer price). This is based on the assets that Cardno has today performing in line with what we expect can be achieved under the strategic plan This price expectation is readily supportable by recent market (whole of company) transactions (such as the Coffey takeover - see W&D last week).
Of course, when the business is operating well (again) it will have many options, and we see this value as capable of moving upwards yet, by some significant degree.
This is similar to what happened with Energy Developments where the $5.50ps valuation we had in 2009 (at the time of the $2.76ps takeover price) eventually moved to $8ps in 2014, which is the same as the takeover price we have received this month from DUET.