Engineering and contracting group Emerson Stewart has announced plans to purchase privately-owned Ocean to Outback Contracting (OTOC) in a deal that will shift control of its share register.
Engineering and contracting group Emerson Stewart has announced plans to purchase privately-owned Ocean to Outback Contracting (OTOC) in a deal that will shift control of its share register.
Emerson Stewart will pay up to $28 million in cash and shares for OTOC, which last week was named as one of 10 winners in WA Business News Rising Stars awards for fast-growing businesses.
OTOC, which was established by managing director Adam Lamond in 2003, has 160 staff and specialises in the delivery and installation of mine site accommodation.
Mr Lamond will become the single largest shareholder in Emerson Stewart, with an estimated 21.4 per cent stake, and will join the company’s board.
Collectively, the six shareholders in OTOC will own up to 42 per cent of the combined group.
Emerson Stewart has been a consistent underperformer since the business listed on the stock exchange.
It lost $1.7 million in the 2010 financial year and recently forecast earnings before interest and tax (EBIT) of $1.1 million in the 2011 financial year, which was below its expectations.
It is hoping the acquisition, which is subject to due diligence, will attract investor attention to the enlarged company.
“The proposed transaction would be the catalyst to create scale and relevance to Emerson Stewart as a publicly listed entity,” its managing director Dario Amara said in a statement.
He is also hoping that the existing client network of Emerson Stewart and its subsidiary, surveying company Whelans, will boost OTOC.
“It is perceived that there are leverage opportunities for the OTOC business off the ETW Whelans established network base in the north of WA.”
The acquisition terms comprise an initial payment of $20 million, split 50:50 between cash and shares, and a further $8 million in performance shares.
If OTOC delivers EBIT of $6.5 million or more in the 2012 financial year, the vendors will be able to convert all of the performance shares to ordinary shares.
On this basis, the purchase would be priced at 4.3 times EBIT.
If EBIT is less than $5.5 million, none of the performance shares can be converted.
Emerson Stewart has also announced a balance sheet restructuring.
It plans a 2 for 7 share consolidation, a $5.5 million rights issue and an $11.9 million placement.
The capital raisings will be at a post-consolidation price of 20 cents per share; that compares with a current market price of 4 cents per share.
If OTOC achieves EBIT of $6.5 million, its earnings contribution will be about double that of the existing Emerson Stewart business.
Emerson has projected FY 2012 revenue of $35 million “with a corresponding EBIT of around $3.5 million with a base case of at least $2.75 million”.
Emerson Stewart was advised by Minaret Capital, OTOC was advised by Bedford Capital Partners, and Bedford along with Bligh Capital Partners will manage the capital raisings.
