SKE (ASX) Ann: Skilled Group to be acquired by Programmed

Originally posted by madamswer ↑

Sparker,

Apologies for the confusion. To be consistent with the various market commentators and analysts on the day the transaction was announced, my calculation was done based on PRG's closing price before trading was halted in both stocks.

On that basis the fair value SKE price was $1.725

Insofar as putting on a merger arbitrage trade here, I have to inclination to make the required arrangements for shorting one of the legs of the deal, nor am I smart enough to do so.

There are too many moving parts for my limited synapses to deal with.

For example, what needs to be taken into account when defining an "appropriate" theoretical discount for SKE's share price versus the full fair value price are things like:

- The value of the franking credits relating to the upcoming PRG dividend, which SKE shareholders will not enjoy

- The risks to completion of the transaction (while small, the market will never, especially at this early stage, factor in 100% certainty of closure)

- The value of the franking credits on any dividend that SKE pays in respect of its final dividend, if any at all.

- The time value of all the various cash disbursements.

Instead, I think that to make money - or otherwise - from this situation will all come down to how investors fundamentally view the merged entity, and what valuation multiples the market will ultimately apply, versus the see-through multiples right now.

So while some SKE shareholders might indeed wait for finalisation day, and then start to offload their shares after banking the current arbitrage between the two share prices, I expect that the share prices of both entities will have re-rated long before that.

So if you are waiting for this "selling pressure" by SKE holders to provide you with a point of entry to the merged entity, then I suspect you will be doing so from share prices that are somewhat higher than they are today.

Of course, this is predicated on my assumption (a not overly aggressive one, I don't think) that the market will come round to thinking that 7.8x P/E, 5.4x EV/EBITDA, 6.6x EV/EBIT and a DY in excess of 6% (at just a 50% payout ratio) for the merged entity is simply too cheap.

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"Of course, this is predicated on my assumption (a not overly aggressive one, I don't think) that the market will come round to thinking that 7.8x P/E, 5.4x EV/EBITDA, 6.6x EV/EBIT"

By way of clarification, these multiples reflect the banking of the full $35m of synergies (which - experience shows - seldom happens).

Going with just $20m of synergies for the sake of prudence, yields still-attractive valuation metrics of 8.7xP/E, 5.9x EV/EBITDA, 7.3x EV/EBIT