Special situation fund Black Crane stalks deal-hungry Emeco
The Australian Financial Review
There are a few things to read into Black Crane Asia Opportunities Fund's move up Emeco Holdings' shareholder register at a time when the equipment rental company is in talks on two deals.
The Hong Kong-based special situations fund now owns an 8.4 per cent Emeco stake, after emerging as a substantial shareholder in March.
In that time, Macquarie Capital-advised Emeco has announced the $53 million acquisition of Rentco and also entered talks with Advent Private Capital-backed Orionstone about a potential scrip merger.
Black Crane and fellow Emeco shareholder First Samuel have been vocal about both the Rentco and Orionstone deals. The pair, who together own about 25 per cent of the issued equity, threatened to spill Emeco's board if it went through with the Rentco acquisition.
Then the two shareholders came out in support of an all-scrip merger with JPMorgan-advised Orionstone.
Emeco has since pushed back completion of the Rentco deal and started formal talks with Orionstone - in moves likely to appease the company's two largest shareholders.
So hedge funds and other Emeco shareholders are now wondering what Black Crane's move up Emeco's register says about both deals.
It's understood Black Crane still sees value in industry consolidation at a time when all mining equipment companies are doing it tough. However it is still believed to hold the view the Orionstone deal is much more favourable to the Rentco acquisition.
Dissidents urge Emeco tie-up
The West Australian
Two of Emeco Holdings' biggest shareholders have thrown their weight behind a merger bid from rival heavy equipment renter Orionstone.
Emeco's board made an unenthusiastic response to the proposal from the private equity-backed company, made public yesterday after about six months of discussions.
Fund managers First Samuel and Black Crane Capital — vocal opponents of Emeco's deal to buy WA-based truck supplier Rentco — swung behind the Orionstone proposal.
'First Samuel is aware of the economics of the proposed merger and can see compelling logic in such a transaction for the benefit of all shareholders,' chief investment officer Dennison Hamblin said in a letter to Emeco chairman Alec Brennan.
Black Crane managing partner Peter Kennan said in a separate letter the bid was a superior alternative to the Rentco acquisition, which he called a distraction from turning around the core business.
First Samuel holds a 17 per cent stake in Emeco and Black Crane 7 per cent.
Emeco has agreed to pay Rentco owners Bob and John Shier up to $76 million in a deal that has been delayed until the end of this month.
Queensland-based Orionstone has proposed an all-scrip, nil- premium transaction, whereby Emeco would issue new shares to Orionstone shareholders in exchange for their shares.
The merger ratio would be agreed with the Emeco board based on asset and earnings-based valuation methodologies.
Orionstone managing director Ashley Fraser said a tie-up would create a stronger and more diverse business by industry, commodity and client.
'Together, we would draw on the complementary assets and collective expertise of both companies' management and employees to provide customers with a broader suite of assets and an enhanced service offering,' he said.
Emeco said the proposal was incomplete, with funding not in place for a transaction.
The contractor said it had extensively reviewed acquisition opportunities and was considering a number of options, including the Orionstone plan.
'The challenging market conditions in the mining sector are giving rise to potential opportunities and Emeco's improvements have enabled us to pursue them,' Emeco said.
West Australian Newspapers Limited
No action' on Orionstone deal yet, recommends Emeco
The two largest shareholders of mining equipment rental business Emeco have urged their company's board to pursue a merger with private competitor Orionstone.
In letters to the chairman and managing director of Emeco, published by Street Talk, First Samuel chief investment officer Dennison Hambling and Black Crane Capital managing partner Peter Kennan stressed the benefits of the merger for shareholders.
Sources told The Australian Financial Review Emeco has been in discussions with Orionstone regarding a potential combination for about six months but the parties have been unable to reach an agreeable outcome.
Call to end Rentco deal
Orionstone's public disclosure of the proposal was met on Wednesday with a 'no action' recommendation from Emeco. It comes less than a month after Emeco struck a separate deal to acquire haulage business Rentco.
Orionstone is calling for the Rentco acquisition to be terminated if it can be ended on reasonable terms. It is understood the two deals aren't mutually exclusive.
Emeco said it remained engaged in considering a number of opportunities, including the Orionstone proposal, but the offer to merge from its private competitor had a number of 'incomplete' elements. It suggested Orionstone lacked enough funding for the combined entity.
'Accordingly, there is no certainty that the Orionstone proposal will lead to a transaction and Emeco recommends that shareholders take no action at this time,' the company said in a statement.
But First Samuel and Black Crane are keen for the Emeco board to push ahead with the merger.
'First Samuel is aware of the economics of the proposed merger and can see propelling logic in such a transaction for the benefit of all shareholders,' Mr Hamblin wrote on Wednesday.
'We urge Emeco to fully engage with Orionstone and its advisers to swiftly finalise terms, absent a clearly better proposal for shareholders.'
Both Mr Hambling and Mr Kennan also reiterated their objection to the Rentco deal.
'We believe this is a superior alternative to the Rentco acquisition, which does not address the fundamental challenges facing the company's core mining equipment business,' Mr Kennan said.
'We think that the Rentco acquisition is a distraction from turning around the core business [and] an unnecessary use of cash resources.'
Melbourne-based First Samuel has a 17 per cent stake in Emeco and Black Crane Capital has a 7 per cent stake.
Macquarie Capital is advising Emeco, while JPMorgan is working for Advent Private Capital-backed Orionstone.
Better business mix
Orionstone is understood to be working to convince Emeco to agree to potential funding arrangements and a capital structure for the combined entity before approaching banks together.
The merger would create a top-five rental company with a more attractive business mix and improved financial metrics, Orionstone said, proposing that Emeco would acquire the Queensland-based private company with scrip. A merger ratio would be agreed with Emeco's board, based on asset and earnings-based valuations.
Orionstone said the combined businesses' net debt would be worth 5.3-times earnings before interest, tax, depreciation and amortisation, which was less than Emeco's 7.2-times at December 31.
The merged entity would have made $326 million in sales for the year to December 31 and $93 million in earnings before interest, taxation, depreciation and amortisation, excluding synergies, based on Orionstone's calculations. Cost synergies were estimated to be worth an additional $34 million a year.
Emeco investors back Orionstone merger
The two largest shareholders in mining equipment rental group Emeco have called for the company to engage with rival player Orionstone over a proposed merger of equals. Emeco’s largest shareholder, First Samuel, and its second-largest shareholder, Black Crane Capital, have both written to Emeco urging the group to negotiate a union with Orionstone.
The two investors, which together account for 24 per cent of Emeco’s shares, have criticised Emeco’s proposed acquisition of haulage hire business Rentco, due for completion later this month.
Black Crane’s Peter Kennan told The Australian he expected the board to engage with Orionstone.
“We want management and the board to pull in behind us and negotiate the best outcome they can with Orionstone, and then put that proposal, whatever it is, to shareholders. Not second-guess shareholders,” he said.
Black Crane has been critical of Emeco’s decision to pursue an acquisition of haulage group Rentco which would take Emeco outside of its core business area.
Emeco had been in talks for six months before Orionstone’s decision to take its proposed merger of equals public.
Orionstone, which is backed by private equity group Advent Private Capital, yesterday went public with its proposal for a nil-premium merger with Emeco.
Orionstone says a combined group would have sales of $326 million, pre-synergy earnings of $93m, a debt-to-earnings ratio well below Emeco’s current levels, and about $34m in synergies.
Orionstone talked up its operating credentials, noting that it had achieved margins of about 40-50 per cent through the mining cycle. In contrast, Emeco’s margins have sat at 20 per cent.
Emeco is understood to have some doubts about the figures, and in particular whether the deal would reflect the contractor’s recent improvements and the trajectory of the two businesses.
The utilisation rate across Emeco’s equipment fleet has increased from 40 per cent to 75 per cent in recent months on the back of a number of recent contract wins, while the company has also been improving its cost base. “Emeco has improved the strength of its business over the past year, with an improved competitive position, significant increases in its utilisation and a more flexible financing structure,” Emeco said.
Emeco last month announced a $53m deal to acquire road haulage and trailer rental company Rentco, which drew some criticism from Emeco shareholders.
Orionstone said the Rentco deal should be terminated “in the best interests of shareholders”.
Orionstone managing director Ashley Fraser said a combination of Emeco and Orionstone would create “a stronger and more diverse business by industry, commodity and client”.
Advent bought a significant stake in Orionstone in late 2011 when it committed $68m in funding to the group.Shares in Emeco closed half a cent higher at 11.5c yesterday.
Emeco buys time to talk up Rentco deal
The West Australian
Dissident Emeco Holdings shareholders say a month-long delay in the proposed $53 million purchase of a WA truck rental business has given them more time to scuttle the deal.
In its first public statement since opposition emerged two weeks ago, Emeco's under-pressure board yesterday reaffirmed its backing of the acquisition of Bob and John Shier's Rentco Transport Equipment Rentals.
Angry shareholders, led by two institutional investors, claim at least 35 per cent of the mining equipment supplier's register reject the transaction and may still push to spill the board.
Emeco said buyer and seller had agreed to push back completion of the purchase to April 30 to satisfy outstanding conditions.
'The Emeco board has confirmed its full support for the Rentco acquisition as a key move under the group's strategy to diversify and create a more resilient business,' the contractor said. 'However, the board is engaging in discussions with shareholders who have raised issues with a view to addressing their concerns.'
The push against the deal struck by Emeco managing director Ken Lewsey has been led by 7 per cent shareholder Black Crane Capital and First Samuel, which has a 17 per cent stake.
Black Crane managing partner Peter Kennan said there had been several discussions with Emeco.
'Having the delay is useful from our perspective,' Mr Kennan said.
'Our objective is still to see whether we can convince management and the board that this is not in shareholder interests.
'We haven't spoken to one single shareholder who thinks it's a good idea. Most shareholders we've spoken to are completely perplexed how they can even contemplate this.'
The next move could come 'within days'.
Including debt, the Rentco deal has an enterprise value of $82 million. The deal is worth up to $76 million for the Shiers.
The dissidents object to issuing $11.4 million in Emeco shares to the Shiers at the historically low price of 12.6¢ a share.
West Australian Newspapers Limited