SYDNEY Australia's Downer EDI Ltd (DOW.AX) offered to buy cleaner-caterer Spotless Group Holdings Ltd (SPO.AX) for A$1.27 billion ($982 million), a surprise target which the engineering contractor said would cut its reliance on the mining sector.
For four years firms which supply and maintain infrastructure for Australian miners have been scrambling to shore up business as a commodities rout led clients to slash spending. Downer rivals Bradken Ltd (BKN.AX) and Macmahon Holdings Ltd (MAH.AX) are both facing takeovers.
Downer has been diversifying away from mining services by buying companies in parallel industries, but the Spotless buyout would be its biggest acquisition to date and the furthest from its main business.
"It makes sense," said Steven Daghlian, an analyst at Commonwealth Securities, which holds Downer shares. "It's a completely different industry but they seem to be up to the task."
Downer said a buyout of Spotless would cut its mining revenue to 14 percent of its total revenue, from 19 percent, and cut "engineering, construction and maintenance" revenue to 18 percent from 26 percent, while "facilities services" revenue would jump to 29 percent from nothing.
The A$1.15-per-share offer came a day after Spotless's shares closed at A$0.73, their lowest since listing in 2014 with an issue price of A$1.60.
Private equity firm Pacific Equity Partners listed the company less than two years after buying it, with promises to boost its earnings by stripping costs and selling underperforming divisions.
Spotless has since delivered a series of earnings downgrades, blaming slowness of government contracts and the mining downturn. In January it received a class action filing from shareholders alleging a breach of disclosure rules.
The Melbourne-based company said in a statement that it would evaluate Downer's offer and shareholders should take no action until it made a recommendation.
The offer was "highly conditional" including a requirement that Spotless not change its earnings guidance.
Downer shares were in a trading halt as the company sought to raise A$1 billion to pay for the acquisition. Spotless shares were up 45 percent at A$1.05, below Downer's offer price, as investors factored in uncertainty about whether Spotless would recommend the offer.
(Reporting by Byron Kaye and Sonali Paul; Editing by Stephen Coates)