Investment Matters

Cardno's proposed demerger

Last week we received further detail around Cardno’s intention to demerge part of its business to create a new company – Intega.  Intega will constitute what was previously Cardno’s construction materials testing, subsurface utility and quality assurance businesses.

The proposed demerger is likely to add value by enabling the growth for both Cardno and Intega. Furthermore, the demerger will allow market participants (or potential acquirers) to gain a greater appreciation of each respective business.

What will the demerger mean for shareholders?

The company has proposed that eligible Cardno shareholders will receive one Intega Share for every one Cardno Share they hold as at the Demerger Scheme Record Date.

No consideration (i.e. cash) will be required from Cardno shareholders for this.

Why has the company decided to demerge?

As we have discussed previously, there can be several reasons for instituting a de-merger.  The basic premise is that the two de-merged entities are worth more than they would be as a group, net of separation costs and the costs of running the businesses individually.

Cardno has identified that under the “Cardno” umbrella there are two very distinct (both culturally and operationally) businesses that are operating.

Its professional services related businesses typically employs a consulting services workforce.  In contrast, the soon to be Intega has a more “blue-collar” field-based workforce.

These differences in activities have brought with them a difference in culture, growth ambitions (i.e. capital requirements) and operating models.

Cardno sees that the separation of these two distinct businesses will better facilitate these distinct cultures, increase transparency (both internally and for stakeholders) and accountability.

Most importantly (in our assessment) the demerger will allow for better access to capital and debt markets for each company, based on their distinct operations and requirements.

With its recent acquisition of Raba Kistner (a Texas-based engineering services firm) Cardno now has scale sufficient scale with which to justify a demerged entity (i.e. to bear the costs of running Intega as a separate business).

How do you see the trajectory of each company changing as a result of the proposed de-merger?

There is potential that the demerger will facilitate both greater market appreciation of each respective business.  This could come in the form of share price appreciation or potentially corporate activity.

Furthermore, we believe the ability for the businesses to operate as two distinct entities, with distinct cultures and capital structure will assist their growth ambitions.

We note that Intega, in particular, has considerable potential to grow its operations in the US.  This may occur both organically, i.e. through growing its existing businesses and inorganically, i.e. through acquisition.  Furthermore, the industry in the US has favourable dynamics, in that it is largely fragmented and will be driven by a pressing need for works in the form of maintenance and building of new infrastructure.

How does the demerger change our investment rationale?

We assess that the announced demerger has the potential to enhance the value we see in Cardno.  Though the demerged entity will have a degree of duplicated costs, we assess that this is outweighed by the benefits of a separate management structure, culture and the options for growth that will become more available.

We see that both entities will continue to benefit from what we see as secular demand drivers, namely the need for greater infrastructure (and environmental remediation expenditure), particularly in the US and Australia.

Our position gives us a geographically diversified exposure to this thematic at a price we consider is reasonable.

We also note that the majority shareholder in Cardno (and if the demerger proceeds, of Intega) is private equity firm Crescent Capital.  As a result, we see that the company is highly motivated to deliver an appropriate return for shareholders, within an investment time horizon that is aligned with our own.

Major Transport Infrastructure Projects - Australia

Week 11 FY 20 Transport

Source: Macromonitor, Australian construction outlook forecasting service: Transport infrastructure 
When will the demerger be finalised?

Votes with respect to the demerger will be tallied at the Annual General Meeting on the 10th of October 2019.

We are likely to vote in favour of the demerger.

If approved, the demerger is expected to proceed with an effective date of the 21st of October of 2019, with Intega shares expected to commence trading (on a normal settlement basis) on the 1st of November 2019.