G4S Plc, the world’s largest security company, faces pressure to reshuffle its board after investors’ opposition derailed the planned 5.2 billion-pound ($8.3 billion) purchase of cleaning company ISS A/S.
Chairman Alf Duch-Pedersen should take responsibilty for failing to identify the “right way to go about” implementing G4S’s strategy, said Edoardo Mercadante, a fund manager at Parvus Asset Management LLP. Parvus says it’s G4S’s third-largest investor.
“I am disappointed that the chairman is still around because I think he has to take responsibility for this mess,” said Mercadante, who says he still backs Chief Executive Officer Nick Buckles. “There was such an opposition for days, and they wanted to go ahead.”
G4S was attempting its biggest acquisition via a rights offer and the addition of about 3.8 billion pounds in borrowings, just as Europe’s debt crisis intensified. The aborted takeover comes two weeks after Buckles announced the plan and said he had the backing from the dozen top shareholders to create an integrated services company.
Duch-Pedersen and his board faced a crisis of confidence ahead of an extraordinary shareholders’ meeting scheduled for tomorrow in London to seek investor backing for the purchase. The failed approach for ISS, owned by funds advised by EQT Partners and Goldman Sachs Capital Partners, will cost G4S about 50 million pounds in fees, tied to lining up financing.
Shares of G4S were up 1.4 percent at 247.6 pence as of 10:56 a.m. local time. Shareholders had displayed resistance to the combination from the start, with G4S stock falling a record 22 percent on the day of the announcement, and some investors calling the deal too risky.
G4S, based in Crawley, England, had advertised the purchase as a “real game changer,” arguing that the addition of ISS would let G4S bundle different kinds of office-upkeep and security services into a single contract.
“The position of the CEO and the chairman in particular will now probably be looked at,” said Caroline de la Soujeole, an analyst at Seymour Pierce Ltd. “In a case like this, when a big deal is announced and does not go through, you always have to ask questions about management.”
Seymour maintained its “hold” rating on G4S until the position of management becomes clear.
Canvassing investors more widely threw up objections, G4S said today. The board “listened carefully” to the concerns and deemed it “inappropriate” to proceed, the company said in a statement. Buckles said today, while disappointed, he respects “the importance of shareholders’ views.”
Harris Associates LP, among the top five shareholders of G4S, said yesterday that it cannot support the acquisition of ISS “under the stated terms,” joining other objectors including Parvus. Buckles had sought to salvage the deal by traveling to the U.S. and Denmark and gain backing for the purchase.
“The company was doing fantastically well as a stand-alone operation focusing on its key security market and that is clearly why the current shareholder base was in the stock,” said David Greenall, an analyst at RBC Capital Markets. “Perhaps the timing of trying to take on such a huge deal with such an amount of debt was always going to prove difficult.”
Buckles was targeting the global market for facilities management that he said is worth about 500 billion pounds. ISS had retreated from plans earlier this year to sell shares in an initial public offering because of weak capital markets.
Shareholders balked at the price, which is about 1.2 billion pounds without debt, and said absorbing the world’s fourth-largest private employer with more than 500,000 workers might be too complicated.
G4S said its business “continues to develop positively,” with organic growth of 5 percent in the first nine months of 2011. The company still plans to make acquisitions to “add capability,” it added today.
Parvus would support a smaller move by G4S to create an integrated services provider, to test the strategy works and yields benefits. Buckles had said the deal would generate 100 million pounds in annual cost savings by 2014, drive growth in emerging markets and boost earnings per share by at least 10 percent.
“I am not convinced that cleaning is a service you want to self-deliver but at least they could learn more about this business on a small scale,” Parvus’ Mercadante said. “We would not oppose that.”
Deutsche Bank AG, Royal Bank of Scotland Plc and HSBC Holdings Plc were underwriting new debt facilities. Deutsche Bank and Greenhill had been joint advisers to G4S, alongside HSBC and RBS Hoare Govett.