Service Stream Limited (ASX: SSM) shares are currently in a trading halt right now so it can do a capital raising to fund a takeover of a Lendlease Group (ASX: LLC) business.
Takeover and capital raising
Service Stream is going to acquire Lendlease Services, a leading national services provider operating across the telecommunications, utilities and transportation sectors.
The business has an enterprise value of $310 million, or a equity/share purchase price of approximately $295 million after adjusting for debt and debt-like items.
At that value, there is an implied enterprise value to pro forma (calculated) EBITDA (EBITDA explained) ratio of 6.9x before synergies and 5x after synergies. Essentially, Service Stream is saying it believes it’s buying business at almost 7x today’s operating profit and 5x operating profit after getting the benefit of its combined business.
Service Stream expects this deal to add approximately 30% to its underlying profit/earnings per share (EPS) (EPS-A) for FY22, including synergies.
Why is Service Stream buying this business?
The company said this deal was highly complementary and supported by compelling strategic reasoning.
It will be “transformational” and diversify operations, creating a leading multi-network service provider.
This deal will enhance its capabilities and expand its addressable markets. The two businesses will have complementary client bases across known and familiar markets, with “compelling” synergy realisation and business combination benefits.
Management said the deal was financially attractive and highly adds to earnings.
Capital raising
The acquisition is going to be funded through a combination of debt and a fully underwritten $185 million capital raising. That’s split between a 1 for 3 entitlement offer to raise $123.1 million and a $61.9 million placement.
This will be done at a price of $0.90 per share, a 6.2% discount to the last traded price.
Summary thoughts
Service Stream also gave a profit update, it said that its FY21 EBITDA from operations was $80.3 million, underlying net profit was $39.1 million and statutory net profit was $29.4 million.
This seems like a good move by Service Stream, though time will tell if the company can integrate the business well and achieve the synergies it’s talking about.
The Service Stream share price has suffered over the last year, this capital raising is being done at a cheap price. But hopefully it will help earnings grow substantially.
There are other ASX growth shares that have easier growth prospects at higher margins that I’m attracted to over Service Stream, for now.
