IT growth industry in fraught recruitment sector
IT MAY HAVE been a pure coincidence but it was interesting to see staffing services groups Adcorp and Paracon separately issuing cautionary statements on the same day just over a week ago. Small cap analysts haven’t ruled out the possibility both may be talking to each other about a possible deal. Both operate in an industry fighting for survival, making it rational to consolidate themselves into bigger companies.
Adcorp is the biggest employment services – a polite term the industry prefers instead of labour broker – company in South Africa, more than double the size of Paracon in terms of market capitalisation. Assuming the groups are indeed talking to each other, Adcorp would in that case be the “senior partner” and therefore the acquiring firm.
But besides both being human resources companies, what synergies exist between them to warrant a merger? In terms of market positioning they operate in different segments, says Siphamandla Shozi, a small cap analyst at Cape Town-based Coronation Fund Managers. Adcorp is more into blue collar recruitment, though it also does a bit of white collar placements, while Paracon provides specialised IT staff.
“IT recruitment is a growth area in the industry and a company as big as Adcorp would probably be looking into it,” says Shozi. “If Adcorp were looking into getting into IT recruitment in a big way, then acquiring Paracon would be the right way to do it.”
Paracon is one of SA’s smallest public staffing services groups. It listed in 1999 and turns around R1bn/year. With its niche, the group would enable Adcorp to grow its white collar recruitment business if it were to be acquired (and SA’s competition authorities don’t have a problem with that). The merged entity would have a combined turnover of R6bn and dwarf that of Adcorp’s closest rival, The Kelly Group, by a big margin.
However, Paracon may not come cheap. One analyst says Adcorp would probably need to pay a premium of between 10% and 20% on Paracon’s targeted price of 237c/share for a 100% acquisition. Currently Paracon’s shares exchange hands at around 185c each. The company trades on an earnings multiple of 9,8 times.
Staffing services groups are currently not the favourite stocks on the JSE. Troubling the sector isn’t only SA’s stagnant job growth but also the pending labour legislation Government – influenced by leading trade union federation Cosatu – wants to introduce in a bid to deal with the alleged exploitation of workers employed by labour brokers. Though Cosatu has argued for the total banning of the industry, that’s unlikely to happen. However, tight policing of the sector is what most prefer and say it’s in line with SA’s Constitution. Such negative sentiments have had an impact on the share price performance of both counters.
Shozi says – though he wouldn’t say Paracon is a small company – the general market view is smaller recruitment agencies will be the ones finding it difficult to comply with SA’s planned arduous labour legislation. As such, it’s prudent smaller counters in the sector start consolidating themselves into bigger groups. “When you consolidate you create economies of scale,” he says.
Over the past couple of years, Adcorp has been diversifying its operations. It’s increased its training division to reduce its exposure to recruitment and ostensibly also in reaction to the growing cloud of uncertainties hovering above staffing services providers.