HONG KONG (Reuters Breakingviews) - A bid for Spotless cannot scrub clean private equity’s reputation in Australia. On Tuesday leftfield bidder Downer EDI made a surprise A$1.3 billion ($1 billion) offer for the struggling cleaning and catering firm. That represents a reasonable premium to a beaten-up share price. But this will remain a cautionary tale for Aussie investors wary of listings by former leveraged buyouts.
Gauging value in semi-distressed situations like this is hard. Downer’s timing seems opportunistic after Spotless shares hit record lows. It’s also a brave move: the investment will pull Downer sideways into facility services, and treble its workforce. The natural way to hedge that boldness is to buy cheap.
Nonetheless, a price of A$1.15 a share is 59 percent higher than where the stock closed on Monday, and 42 percent ahead of average trading over the last month. It would be understandable for Spotless shareholders, battered by a string of disappointments, to take the money and run.
Putting Spotless out of its misery will not win round Australian investors sceptical of PE-backed deals. They have been burnt by other buyout flops like electronics retailer Dick Smith, and Myer, a department store chain. In fairness, it is some time since Spotless was last controlled by a buyout firm. Former backer Pacific Equity Partners completed its exit nearly two years ago. But the fact remains that anyone who bought into the 2014 initial public offering at A$1.60 a share will not be made whole now.
Of course, PE hardly has a monopoly on ropey IPOs. And Australia’s buyout industry may point to notable successes. APN Outdoor, for example, has seen its share price more than double since listing in late 2014. A study by Rothschild and the industry lobby found PE-backed IPOs beat other Australian debuts soundly in 2013-2015, generating a weighted average return of 26 percent. Alignment with other investors has improved in recent years, since backers now rarely sell all their shares at once.
That said, the deals that do go wrong generate lots of mud, and it sticks. Ugly headlines help prospective shareholders beat sellers down on price. With this spotty track record, private equity will still face some scepticism down under.
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