Little traction in Thiess' offer for MACA

Thiess this week attempted to pick up the pace and progress its off market takeover offer for MACA Ltd, announcing that if acceptances are more than 50% by the end of next week, the minimum 90% acceptance condition will be waived, and the offer declared unconditional.

“We are giving MACA shareholders a significant opportunity to maximise the prospects of the Offer becoming unconditional and receive their cash consideration in a timely manner by supporting Thiess to reach a relevant interest in more than 50% of the shares in MACA.” - Michael Wright, Thiess CEO

In layman’s terms, Thiess are happy to settle for control of MACA if they can’t buy the whole thing outright. The concession increases the certainty that tendering shareholders will receive their $1.075 per share proceeds, and adding a deadline dangles a carrot in front of investors still on the fence.

Unsaid is that acceptances to date, despite an increase in the offer price, have been painfully slow. For all the prospects of a certain $1.075 in cash, current acceptances indicate the offer clearly isn’t as compelling as Thiess might think it is (at least on the MACA side of the table).

There are evident reasons.

Most obvious is that listed peer NRW Holdings Limited (NWH.ASX) attempted to submit their own offer at a higher valuation that what Thiess proposes to pay – a cash and scrip proposal valuing MACA at $1.085. The fluctuating scrip component of NRW’s offer in contrast to Thiess' firm cash bid, along with the commercial sensitivities of opening up the books to a competitor without a guarantee of the bid sticking, meant the board chose not to engage.

NRW withdrew their interest and MACA shareholders have since sat watching the increase in implied value of what might have been. NRW’s share price was $2.26 at the time it submitted the proposal. Today, it’s around $2.70. The withdrawn offer would currently be worth $1.19 per share (and towards the top end of the Independent Expert's valuation range) while Thiess sits at $1.075. A scenario where NWH is capable of a clear run at MACA - after an unsuccessful, lapsed Theiss offer, for example - might see a superior outcome for MACA shareholders.

However, NWH is not the only sector peer to see their share price materially higher in the period since Thiess first announced its offer. Of the peer set identified in the Independent Expert Report in the Target's Statement, the average share price gain through to September 14 is 31%. In the context of Thiess’ offer of $1.075 as a 49% premium to the undisturbed, it’s not an outlandish suggestion to say that MACA might have captured a significant portion of that premium anyway in the absence of an offer.

One argument is that the MACA bid improved sentiment amongst its peers; in effect, it’s the tail wagging the dog. This, however, belies the general multiple compression across the sector over the last twelve months due to fears of cost inflation running rampant through a sector typically run on skinny margins. The August reporting season showed better than expected cost control amongst the peer group with results generally at the top end or marginally above guidance, and share prices have appropriately responded.

Indeed, the rolling multiple of the derived Mining Services Peers index presented in the Independent Expert’s Report suggests Thiess’ offer has come at a low point in the cycle, particularly over the last six months:

When adjusting the above chart for the August earnings results of the peer group (and noting the MACA specific multiple being skewed by a one off $23.7m loss in the Interquip segment), the expected control multiple might otherwise have come in higher than what Thiess is offering. We’d be remiss not to point out that Elliott took its 50% stake in Theiss at an 8.3x EV/EBITA multiple in December 2020, and that’s after considering an ESG discount for Theiss’ exposure to coal mining services. Put us down as unconvinced 7.25x – 7.75x for MACA is the right multiple. 

Then there’s the fact that the offer is below the company’s net tangible asset backing. At a time when labour shortages are considerable and long lead times on equipment persist, there is an inherent strategic value in MACA’s existing asset base and workforce. Consider a new market entrant looking to compete via building instead of buying – the cost and time to replicate a similar market position would be far greater that what MACA’s current book value suggests, and yet shareholders are being asked to part with it at a discount?

There are other strategic benefits to Thiess on top of the NTA discount to consider. An acquisition of MACA would diversify their current operations away from the current focus on coal and lessen any ESG discount that might be applied when CIMIC and/or Elliott look to divest their interest(s) in Thiess in the years to come. More favourable financing might be obtained with such diversified operations. At least with the scrip offer from NRW, MACA shareholders might have shared in some of the benefits of a combined group.

And so the slow rate of acceptances continues as we grind our way to the offer close. For any takeover offer, shareholders are asked to weigh up the risk of continuing on as a standalone entity against the reward of a control premium. 

In our view, it’s not yet evident the reward sufficiently outweighs the risk.

With Thiess looking to coerce more acceptances with a conditional “unconditional” incentive and hurry the process along, it suggests they’re well aware of how good a deal they’re getting.