How far can a little reassurance go? For struggling engineering contractors it can do wonders as Bradken Limited (ASX: BKN) is finding out this morning.
The stock is up 5.6% at $1.13 and the reassurance couldn't come soon enough with the stock tumbling to a more than six-year low of $1.07 yesterday.
The embattled civil and mining engineer said it is not aware of any reason for the halving of its share price over the past month and reiterated its 2014-15 full year earnings before interest, tax, depreciation and amortisation (EBITDA) guidance of $136-$138 million.
A profit guidance from fellow contractor Sedgman Limited (ASX: SDM) yesterday has also worked wonders for the stock, which has surged 16% since Tuesday to 79 cents. But Bradken's bounce may not be as enduring and I'll explain why in a bit.
Bradken confirmed it's still exploring a merger with industrial and mining equipment supplier Magotteaux Group that was suggested by its "white knights" Sigdo Koppers and CHAMP Private Equity.
Chilean conglomerate Sigdo Koppers owns Magotteaux and Sigdo Koppers has teamed up with CHAMP to invest $70 million in Bradken in the way of redeemable convertible preference securities.
The proceeds from the securities will be used to pay down debt, which should put Bradken's net debt position at around $340 million compared to its market capitalisation of $215 million.
All of this looks well and good but the white knights may be riding black horses – meaning Bradken's eagerness to accept their help may be one of the reasons for its recent sharp share price depreciation.
The key issue is Bradken's senior executives may have a too close for comfort relationship with CHAMP. Bradken used to be owned by CHAMP before it was floated and Bradken's chairman sits on one of CHAMP's advisory boards.
Striking a deal with CHAMP and Sigdo Koppers effectively means that Bradken has blocked any chance of receiving another competing offer. Bradken has received two other bids in the past six months that potentially could be interpreted as superior to the current proposal, although it will be hard to say definitively until the details of the potential merger with Magotteaux are revealed.
But I am bracing myself for a poor outcome and I think most investors are as well, and that's why many have chosen to abandon ship since the news became public.
Bradken's problem isn't as much about earnings as it is about trust.
From that perspective, I think the bounce in Bradken's share price on the back of its earnings affirmation could be short lived.
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