Costain’s £170m bid is likely to remain the only offer and will not increase, say analysts
An imminent refinancing of debt by Mouchel is unlikely to lead to an influx of new parties interested in buying the firm, or to an increased bid from Costain, according to analysts.
Last week Mouchel said an announcement on the refinancing was imminent as it “expects to finalise the new facilities shortly”.
Finalising the refinancing has been a key issue for its management, who initially expected to have the refinancing concluded by March.
But it may not be a major catalyst for a new bid from a third party, or a higher bid from Costain.
“If you read between the lines, Mouchel are on track for a successful refinancing of their banking facilities but this is no longer new news and wouldn’t have a big effect on their share price”, said Peel Hunt analyst Andrew Nussey.
“Their current trading is probably more important than a refinancing”.
A successful refinancing of Mouchel’s debt is likely to be more important to management than investors, according to Mark Fleetwood, analyst at Brewin Dolphin.
“The board wouldn’t want to move before a refinancing takes place as they may view it as having the potential to create more interest [from potential bidders].
“Current shareholders who bought in for the recovery potential will see the refinancing as a good thing but it’s really just a side issue now.”
Costain increased its bid for Mouchel for a second time last week, to 153p per share, valuing the firm at £170m.
It previously made an offer of 105p when Mouchel shares were trading at just 56p in December. Its second offer of 135p was rejected.
As part of its defence, or as a direct condition of its refinancing, Mouchel could sell one or more of its subsidiaries. The Middle East division is seen as most likely to be offloaded.
Its value is unlikely to have a material impact on the financial health of the business though.
“The Middle-East business isn’t worth very much and they have been a willing seller for a while” said Fleetwood. “It may only be worth around £5m, give or take”.
While advising shareholders to “take no action” in reference to Costain’s third bid last week, Mouchel also disclosed that it had been subject to a number of approaches from potentially interested parties.
However, Costain’s £170m bid remains the only firm offer on the table.
Why Mouchel is refinancing
Many things will not be achieved by a successful refinancing of Mouchel’s debt, but there are some positives to be drawn.
First, it allows the board to focus on running the business. Time is scarce when managing a business this size and negotiations are bound to be a big drain.
Just as important to management will be the relief when negotiations are complete. Refinancing should create a floor under the share price, regardless of whether a new bid emerges, or Costain’s bid fails.
Finally, successfully concluding negotiations would strengthen thel board’s hand.
Mouchel and Costain: What the analysts think
Government departments are demanding more up-front working capital before awarding contracts and if Mouchel remains independent, it could end up being broken up as it doesn’t currently have this financial strength.
What Mouchel will need to do is target areas of growth for the future. This means that one or more business units could be sold in order to address its debt.
My advice would be that, all round, the risks are better with Costain.
Espirito Santo Investment Bank
Mouchel is clearly well progressed in terms of its refinancing but it doesn’t change the likelihood of another bid materialising when it’s completed. But certainty over their finances is definitely positive.
The refinancing moves Mouchel from a distressed firm to one where management’s hand in negotiations is significantly strengthened.
It becomes clear from talking to Mouchel management that they are not driven by their ego and there’s a genuine intention to deliver maximum shareholder value.
We are not convinced that sufficient shareholders would support the current bid it to enable it to go through. We would be surprised if Mouchel’s board supported a bid at this level given the longer term recovery potential they have alluded to.
The price looks reasonable on current estimates, but somewhat undemanding if you buy into the recovery potential.
Refinancing isn’t a massive issue for Costain as they have plenty of cash anyway and wouldn’t be too concerned by Mouchel’s debt.