The McMillan Shakespeare Limited (ASX: MMS) share price has risen 3.50% after a trading update by Eclipx Group Limited (ASX: ECX) as a planned merger with the struggling fleet management company appears unlikely.
The Eclipx share price has plummeted 55% at the time of writing following the trading and merger update.
What was in the Eclipx update?
Eclipx announced that its financial performance has "softened" since its 29 January 2019 update as Grays Industrial and Insolvency continue to underperform which has outweighed continued growth in motor vehicle auctions.
Right2Drive has been impacted by weaker-than-anticipated trading conditions and a reassessment of recovery rates from some debtor groups which has resulted in higher provisioning, while the group's Company and Fleet segments have also experienced weaker trade.
Eclipx announced that adjusted NPAT (NPATA) is down 42.4% compared to the first 5 months of FY18 and the group does not expect reported NPATA to be consistent with FY18 (as advised on 29 January 2019) and could not provide full-year guidance at this time.
Despite noting some "positives" from the result, such as higher total group Assets Under Management or Financed (AUMOF) of $2.46 billion, this latest update should see the Eclipx share price plummet when it recommences trading in coming days.
The group intends to simplify its core business and focus on Fleet & Commercial equipment, novated leasing in addition to new car buying and trade-in services while reviewing its Grays and Right2Drive segments.
What was McMillan Shakespeare's response?
McMillan Shakespeare said that given issues raised in the above announcement it does not believe it will be possible to complete the proposed scheme.
The specific issues cited by the company include:
- The 42.4% decline in NPATA compared with the first 5 months of FY18
- Significant issues in the Right2Drive and Grays divisions
- Impact of process errors which Eclipx has identified on past financial years
- A review of operations
- Eclipx no longer expecting to meet FY19 earnings guidance provided to the market on 29 January 2019, and
- Eclipx not providing revised FY19 earnings guidance
McMillan Shakespeare stated that it does not believe an extension of the end date currently set out in the scheme documents would resolve these issues, which looks set to put a pin in merger talks between the two.
So how bad is the damage for Eclipx?
The Eclipx share price has been in freefall since it recommenced trading this morning, falling 55% as the company's financial woes continue.
The proposed merger was set to throw a lifeline to the group but now that that's off the table, investors are flooding out the door, particularly given the group's uncertainty around earnings guidance and dividend payments.
In contrast, the McMillan Shakespeare share price has risen 3.50% at the time of writing on the news and looks set to climb on the abandonment of the merger.
