Following media speculation in the Australian press, Programmed Maintenance Services known as Programmed (ASX: PRG) has confirmed it approached Skilled Group (ASX:SKE) just before Christmas regarding a “merger of equals”.

 According to an Australian Stock Exchange (ASX) Release from Programmed, Skilled is currently evaluating the proposal.

Under the merger of equals proposal, shareholders of each company would hold 50% of the combined group, with “the opportunity to benefit from the value created by anticipated synergies of more than AUD 20 million (USD 16.28 million) per annum.”

Key terms of the proposal according to Programmed were:

• Skilled Group and Programmed shareholders each to own 50% of the Merged Group;
• Skilled shareholders to receive 0.5032 Programmed shares (representing AUD 1.13 in value based on Programmed’s closing share price on the day prior to the proposal) plus 25 cents in cash for each Skilled share.

At the date of the proposal, this valued each Skilled share at AUD 1.38. Programmed, according to the release, proposed a significant premium of 21.3%, before both groups of shareholders share equally the significant synergies.

According to Staffing Industry Analysts, Skilled is the largest staffing firm in Australia and 19^th largest in the world based on 2013 revenue.

Bruce Brook, Chairman of Programmed said, “The industrial logic for the merger to create a market leading staffing, maintenance and facility management business in the competitive markets we face is compelling. We have designed the proposal as a true merger of equals with a significant premium for Skilled shareholders so that each group of shareholders is able to share equally in more than $20 million per annum of anticipated synergy benefits. The merger will diversify both companies' existing businesses and result in an appropriate merged group capital structure."

Skilled in its ASX Release said the company “considers that this approach from Programmed has been opportunistically timed and is based on a closing price for Skilled well below medium and longer term volume-weighted average prices. Any combination of Skilled and Programmed would need to be pursued on terms which reflect appropriate value for Skilled shareholders”.

At the start of the 2014 Skilled’s market capitalisation was nearly twice that of Programmed, but its exposures to the resources sector and the oil and gas sector in particular have ravaged its share price, which has nearly halved in the past six weeks alone and wass down more than -60% since the start of the year. Programmed’s share price has also fallen but only by about -30% and the market capitalisations of the two companies (shown below) are now very similar.

Skilled is in the middle of a leadership change with Mick McMahon hand over to former Foster’s Chief Financial Officer, Angus McKay,on 20th January.

According to Stephen Bartholomeusz writing in The Australian:

One assumes that Programmed is hoping that the logic of the proposal — not just the synergies but the reduced volatility in earnings and the doubled market capitalisation — will generate pressure from Skilled’s institutional shareholders on the Skilled board.

“It is quite obvious from the contents of the letter from Programmed Maintenance Services’ chairman to his counterpart at Skilled Group that the two groups have had very detailed discussions about a merger in the past. It is equally obvious from the nature of the Programmed proposal and Skilled’s initial response that this isn’t the merger transaction Skilled envisaged.

Ultimately, the combination of the two companies does have strong business and stock market logic. Whether the proposal succeeds or fails, however, will hinge on perceptions among the directors and shareholders of both companies of the relative value contributed and retained by their shareholders”.

On Monday, Programmed Maintenance Services Ltd (PRG:ASX) shares closed at AUD 2.58 (USD 2.10) up AUD 0.19 cents ( +7.95%) on the day and +22.86% above the 52 week low of AUD 2.10 (USD 1.71) set on 17 December 2014. This means the company is valued at AUD 283.58 million (USD 230.77 million). Skilled Group Ltd (SKE:ASX) meanwhile closed at AUD 1.53 (USD 1.25), up AUD 0.255 cents (+20.08%), 46.63% above the 52 week low of AUD 1.04 (USD 0.85) set on 17 December, 2014. This means Skilled is valued at AUD 299.41 million (USD 243.65 million).

A copy of the full release by both companies including Programmeds’ letter to the management of Skilled is attached below.