Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

The timing is brave. With Brexit and a general election rumbling on in the U.K., now is not the obvious time for a Franco-British takeover that might involve job losses in Germany. That hasn't stopped a French laundry company from offering to buy a U.K. rival against its will. Add in the financials, and it looks an overly ambitious move.

On Thursday, Elis SA went public with its 2 billion-pound ($2.6 billion) proposal to buy Berendsen Plc after the target rebuffed two earlier approaches.

On the Skids
Berendsen's shareholders may be open to a bid after two profit warnings in quick succession
Source: Bloomberg

The hope is this will prompt Berendsen's shareholders to nudge management toward the negotiating table. They may be tempted after being rinsed by two profit warnings in six months as the company was forced to replace its ageing fleet of washing machines in Britain. Expect some to demand talks.

At first glance, Berendsen's resistance looks hard to justify. Elis's cash-and-stock proposal was worth 11.73 pounds a share at Wednesday's close -- a thumping 41 percent more than Berendsen's undisturbed share price and its three-month average.

Elis shareholders will see the price as full. The Gallic suitor says cost savings from a deal would come to 40 million euros ($44 million) annually after three years. In today's money, that's less than 300 million pounds, against a premium of 600 million pounds over Berendsen's undisturbed market capitalization. The companies' overlapping German operations look like a prime target.

Stock Discount
Berendsen shares have been trading at a steep discount to Elis based on future earnings
Source: Bloomberg
Earnings are based on 12-month blended forward estimates

Still, Elis is pouncing when expectations for Berendsen are at rock bottom. Before the approaches, the U.K. stock was trading at a 20 percent discount to Elis based on estimated earnings.

That low starting point means Elis can justify a deal at the mooted price. The all-in cost including assumed debt would be 2.5 billion pounds. Assuming analysts' earnings estimates are correct, Elis should be able to make a 7 percent return, in line with the target's cost of capital, after three years.

In the meantime, Elis shareholders would have the benefit of a double-digit boost to earnings per share. And Elis's cost-savings target is almost certainly conservative.

Berendsen's decision to reject the proposal is controversial -- but deserves the benefit of the doubt.

The company's stock price has languished recently as investors put little faith in its turnaround plan.

Berendsen Bashing
Analysts have been getting more pessimistic about the stock's future performance
Source: Bloomberg

The large share component in Elis's pitch makes the value of its takeover proposal unreliable -- the fall in the bidder's stock on Thursday morning reduced the premium to about 35 percent.

And Berendsen investors have scant reason to believe Elis, in which they would take a one-third percent stake, will deliver Berendsen's turnaround better than its current CEO.

Elis can probably justify raising its offer, but it will be tricky in practice. The current proposal would push Elis's net debt to more than three times the combined companies' Ebitda. Adding more cash could be tough. 

It's hard to fault the vision of creating a champion in the world of washing dirty laundry. But it looks like Elis may have overreached itself here.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net