Just when the short sellers thought Spotless Group was headed into a death spiral, Grant Fenn from Downer enters with an all-cash offer that places an enterprise value on the target company of $2.1 billion.
Fenn's offer has raised eyebrows for a whole host of reasons, not the least of which is the 60 per cent premium being offered relative to the last Spotless share price.
Other reasons for the undercurrent of concern in the market about Fenn's gung ho approach are the lack of due diligence, the relatively small amount of promised synergy benefits and the lack of overlap between the two businesses.
Here are a range of comments that sum up the negative sentiment that was swirling around the market yesterday.
"This is the greatest get-out-of-jail card for [Spotless] shareholders they have ever seen – don't throw this one away," said Richard Coppleson from Bell Potter.
Coppleson's advice in a nutshell was: "Take the money and run."
"I would consider this deal as one of the worst in the history of Aussie M&A;," said Sujit Dey on the hedge fund sales desk at Credit Suisse.
Dey gave his hedge fund clients at least five reasons why Downer should not have bought Spotless.
He said Spotless had propped up its earnings, had weak cash conversion, its margins had been declining, its market capitalisation of $800 million was less than its net debt of $848 million, and its gearing was getting out of control.
"This acquisition raises lots of red flags!" said a dealer on another hedge fund sales desk in Sydney.
"Massive deal vs acquirer's size, massive equity raising, tenuously related business, low quality franchise, increased gearing, no due diligence, EPS accretion not the relevant metric and increased 'market relevance' doesn't correlate with returns," he said.
However, this same dealer told Chanticleer that "if anyone can make it work, it is Grant Fenn".
It should be noted that hedge fund sales desks make their money out of advising hedge funds on short-selling opportunities.
If anyone had been short Spotless on Monday, they would have been blown away by the Downer bid.
That context could lead you to think there are possibly some sour grapes squeezed into the initial reaction to Downer's takeover offer.
Either way, there are some tough decisions facing shareholders in Downer as they contemplate an equity capital raising that is just under a third of the size of their company.
Do Downer shareholders back the management that has helped turn around Downer?
Do they forget about the lack of due diligence on Spotless and trust Fenn and his team to make the target company more profitable?
Or do they sell the rights to new shares issued through the $1 billion entitlement offer?
If that is their course of action, the next most logical step is to dispose of all their remaining stock.
Of course, there is the possibility that some Downer shareholders will take the view that instead of being transformative, this M&A; deal is actually destructive.
That could prompt them to go from being buyers of the stock to selling it short.
It would not be surprising if the short sellers in Spotless shifted their attention to Downer.
But that would show a complete lack of faith in the proven abilities of Fenn.
Ironically, Fenn's success at Downer draws attention to the historic paucity of management skills in a range of industries reliant upon long-term contracting.
Think about all the profit downgrades and losses that have been incurred at companies that could not work out a positive net present value for contracts they entered into.
High profile examples include Macmahon Holdings, UGL, Worley Parsons, Sedgman and Henry Walker Eltin.
Downer itself is an example of a company that got into serious financial strife thanks to long tail train maintenance contracts with the NSW government.
One of the lessons from these companies is that it is extremely difficult to know, from publicly available financial information, about the granular detail of long-term contracts.
Someone with a long experience in writing long-term contracts told Chanticleer that he used to go on "gut feel".
In some instances, companies such as UGL wrote contracts that could were so large that the balance sheet could not support them when things went wrong. That was woeful risk management.
Fenn said on Tuesday that the Spotless deal was a good one for Downer shareholders because its long-term contracts provided high certainty over revenues.
The weighted average contract revenue is about five years. Fenn is particularly bullish about the public private partnership contracts entered into by Spotless that have lifetime revenues of $10.6 billion and an average tenure of 28 years.
He also likes the new business pipeline of $1.6 billion.
Spotless has been on the nose with fund managers ever since its controversial profit downgrade in December 2015.
That helps explain why Fenn was able to quickly move to 19.9 per cent of the target.
Dey at Credit Suisse believes there is a "material risk" that the deal will never complete because it is conditional on no change to the target company's profit guidance.
Scepticism can be a valuable trait in financial markets, but if you are perpetually sceptical, you will never buy anything.
