The share price of Programmed Maintenance Services Limited (ASX:PRG) surged to a more than two-year high of $3.06 this morning on news that the board of the staffing company is endorsing a takeover bid from a Japanese rival, Persol Group, that values the company at $3.02 a share.
The acquisition will be undertaken through a scheme of arrangement and the offer price is a 68% premium to the stock's last closing price before the announcement and a 69% premium to the three-month volume weighted average price (VWAP) of the company's shares.
The fact that the stock jumped above the offer price may prompt some to conclude that the market expects a competing bid to emerge, which would drive up the offer price for the company.
That's certainly a possibility but I doubt it. The offer price is pretty generous to Programmed Maintenance shareholders given that it values the stock on a forward price-earnings multiple of around 20 times. It's little wonder the board has unanimously backed the deal and any competing bid will need to be substantially higher than $3.02.
Further, the bid is all cash. My favourite type of transaction and it's the type that investors in general prefer over a scrip or part-scrip offer.
I almost never think investors should buy a stock for a takeover, but I'm making an exception in this instance as I see an arbitrage opportunity.
The bid allows Programmed Maintenance to offer a fully franked special dividend to shareholders. The offer price will be reduced by the amount that's paid in dividends. This means Persol will still pay $3.02 a share but the special dividend will allow Programmed Maintenance to distribute its franking credit to shareholders.
Programmed Maintenance reported a franking balance of $70.4 million for the year ended March 31, 2017. This equates to around 27 cents a share that can be released back to shareholders.
I don't know about you, but I love franking credits!
The only question is how much can Programmed Maintenance afford to pay out as a special dividend. The company had a cash balance of $58.7 million at the end of the last financial year, and if it paid all its cash out to shareholders, it would mean a 22.8 cents a share distribution. There's probably no way management can fully utilise its franking balance.
Nonetheless, such a special dividend will still be worth close to an extra 10 cents a share for shareholders who qualify to receive the franking credit (and assuming management times the transaction so that investors can hold the stock for 47 days and the ATO doesn't have any objections).
The arbitrage may not pay off as there are still plenty of unknowns but what is the downside?
Very little I suspect as I think there is a high chance the deal will be consummated at $3.02. Also, the offer is very light on conditions apart from the standard type clauses like approval from the Foreign Review Investment Board (FIRB).
What's more, the stock actually has eased in the late morning to $2.97 as I think investors who cannot collect the franking credit have decided to cash out now instead of waiting a few months for the deal to be completed.
On another matter, the attractive offer price for Programmed Maintenance has probably gone some way to justify Downer EDI Limited's (ASX: DOW) controversial bid for another staffing company Spotless Group Holdings Ltd (ASX: SPO).
