sold to the highest bidder.

THE timing of Coates Hire's announcement of a profit downgrade couldn't have been more unfortunate, given the company is being stalked by private equity firms.

The downgrade was so modest - that in normal circumstances the company may not have bothered providing an early warning signal.

Coates's circumstances, however, are not normal because the company revealed in May that it had received "preliminary approaches" from interested parties, including private equity firms. It responded by announcing a review of its strategic options to maximise value for shareholders.

The group, the country's largest equipment hire group, with about 20 per cent of the overall market (nearest competitor Emeco has about 8 per cent), is peculiarly attractive and vulnerable to private equity.

Under its chief executive since 2003, Malcolm Jackman, the group has aggressively expanded and diversified. In the past two years it has invested nearly $700 million in equipment and acquisitions, with the spending running at about 1.5 times depreciation.

The strategy has been clear. Jackman has aggressively pursued diversification - of the geographies, products, sectors and customers Coates services - to remove some cyclicality and vulnerability from the business.

The scale of investment in the business, however, has unnerved some of the group's big shareholders, given its effect on returns, and the diversification strategy means Coates isn't as leveraged to some of the higher-growth segments of its markets as some of its competitors.

The nature of Coates's business means it has to invest ahead of growth - it has to acquire its equipment upfront if it is to grow revenue and profit in the longer term. The bulge in its capital expenditures has an unavoidable short-term cost to earnings and returns if the group is to generate long-term growth.

The capex program has peaked but it will take time for the revenue growth to come through, creating a window for predators.

The earnings downgrade stems in part to the growth pains being experienced by the sector and its customers.

Bottlenecks in Queensland, including labour and equipment shortages, are short-term issues that should have only a temporary effect.

In the group's more resource-focused business, Allied Hire, the bottleneck issues, which include availability of equipment, may reflect a more systemic and structural challenge.

All this year's state and federal budgets have foreshadowed a massive increase in infrastructure spending.

The resource boom has until recently been more about the prices received for commodities than the volume growth that drives Coates's growth, but that is starting to change as the massive investment in expanded production over the past few years starts to come on stream.


Overseas, the equipment hire industry has attracted a lot of activity from private equity. In this market, Emeco was owned briefly by private equity before it was floated last year.

The very things that have led to some institutional disenchantment with Coates - the strategy that lowered the cyclicality and volatility of its earnings at a cost to near term revenue and earnings growth rates - would make it attractive to a leveraged bid.


*Also refer article of FN Arena News 8/6/07- Coates can't hire a trick!