Skilled Group Ltd. to wed Programmed Maintenance Services Limited: What investors need to know

Analysts are likely to be upgrading the stocks after Skilled Group Ltd. (ASX:SKE) agreed to back the sweetened deal to merge with Programmed Maintenance Services Limited (ASX:PRG).

Brendon Lau

Brendon’s passion for shares started by accident in 2003 and he has worked in various roles around capital markets ever since as a trader, stock analyst and markets reporter with the Australian Financial Review. Most of his wealth has come from share investing than any other asset class, and that has given him the financial freedom not to work full-time, if he chooses to. Brendon is a medium to long-term investor who aims to hold positions for a year or longer and is focused on fundamental analysis, although he will occasionally use technical indicators to time his entries and exits. Brendon has an MBA from Melbourne Business School and is RG 146 certified. He lives in Melbourne with his wife, three kids and two dogs.

Published June 24, 2015 11:17 am AEST

Shares in Skilled Group Ltd. (ASX: SKE) are expected to surge after it threw its support behind a sweetened offer to merge with fellow labour hire company Programmed Maintenance Services Limited (ASX: PRG) to create a $750 million entity.

Programmed is offering 0.55 of its stock and 25 cents cash for every Skilled Group share that values the latter at $1.79 compared with its last closing price of $1.54 a share.

This compares to Programmed's previous offer of a 0.5032 share swap and 25 cents cash, which was quickly rejected by Skilled Group's board.

The improved terms will see Skilled Group's shareholders own 52.4% of the merged group with the deal forecast to be "materially earnings per share (EPS) accretive" for the combined group, although you will have to ignore transaction, integration and other one-off costs associated with the merger.

I have been expecting this outcome since Programmed first approached Skilled Group with an offer in December last year as I believe the merged group will be viewed in a positive light by the investment community because there's more than $20 million in synergies up for grabs post-merger.

The amount is nothing to sneeze at as it represents around a quarter of the combined full year net profit from Programmed and Skilled Group.

These synergies are expected to rise to $35 million within three years of the marriage and lead to double-digit EPS growth in 2015-16 and 2016-17.

There could potentially be even more upside as the synergies primarily focus on cost savings and not the new group's stronger market leadership position, improved earnings diversity and cross selling opportunities.

If the stated synergies and earnings forecast are to be believed, I think analysts will be upgrading the stocks as consensus was tipping a drop in EPS for Skilled Group and single-digit growth for Programmed.

Depending on where the stocks trade when they resume trading later today, this could be an opportunity to buy the stocks for the merger.

Skilled Group's board is urging shareholders to vote in favour of the deal. I own shares in Skilled Group and there're no prizes for guessing which way I will be voting.

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