Cau­tious cou­pling?

IT growth in­dus­try in fraught re­cruit­ment sec­tor

Finweek English Edition - - COM­PA­NIES & MAR­KETS - Cents ANDILE MAKHOLWA andilem@fin­

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.

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