Elis/Berendsen: well pressed
Like corporate uniforms in one of its laundries, Berendsen has endured some rough and tumble. Its shares have landed in a pile, down 30 per cent over a year. Seeing that, French rival Elis quietly had a word, looking to pick up the UK company on the cheap. Berendsen said no.
What has hurt Berendsen’s shares has been downward earnings revisions due to issues with its UK business, which generates about a third of group revenues. Analysts worry about how much this will cost to fix. The Elis bid would not solve the problem.
Yesterday, Elis decided it has had enough of private chats. It went public with the terms of its second offer from May 16, of £4.40 cash per share plus 0.426 Elis shares for each one of Berendsen’s. Executives there had quietly folded that one away, perhaps because it was only 7 per cent above an earlier bid from late April. The latest offer promises €40m of annual cost cuts. Those savings, taxed and capitalised, would not cover the premium to be paid. An initial 30 per cent surge in Berendsen’s shares, shy of the theoretical bid price of £11.72, faded quickly.
One reason for the market’s doubts could involve the buyer’s own finances. Elis already carries net debt equivalent to three times its forward earnings before interest, tax, depreciation and amortisation. Combining with Berendsen would not lower this leverage ratio. Given that, the ability of Elis to pay more looks limited. On top of this, consider that Berendsen already has its own plans to spend considerably more than operating cash flow for the coming three years. That means the UK company will also need more capital, beyond any cost cuts, to cover the negative free cash flow.
This deal would stretch the financial fabric of Elis too far. Judging from the French company’s financial history, it does not have enough cash flow to China’s charm offensive with foreign investors is running up against a $9tn block. International investment in the country’s vast onshore bond market accounts for just 1 per cent of the total. A recent yield curve inversion in government debt offers further reason to steer clear.
Normally, rates on longer-dated sovereign bonds exceed those on short, to compensate investors for extra risk. But yields on Chinese fiveyear debt are higher than 10-year.
Such an anomaly often hints at fears about growth and inflation. In China the drivers appear more varied and less ominous. A bull market supported by monetary stimulus has flipped as Beijing cracks down on the use of borrowed money for meet both Berendsen’s needs and its own. Both companies have plenty to iron out before any deal can go ahead. investment by raising short-term rates. Technical factors are also at play: five-year bonds are less liquid that 10-year bonds, so price moves can be more extreme.
This is the first time such an inversion has been seen since National Interbank Funding Center records began in 2010. China’s bond market might be the third largest in the world but it is young. Capital restrictions and exclusion from global benchmarks make its bonds a mystery to many.
Enthusiasts point to good yields. Investors can earn 3.6 per cent in fiveyear Chinese sovereigns, compared with 1.8 per cent in US Treasuries and 0.3 per cent in UK gilts. Quotas and licensing requirements have been lifted, making it easier for foreigners to buy these sovereigns. A new plan, Bond Connect, agreed this week should simplify matters by removing the need for an onshore trading account.
China wants to promote the renminbi as an international currency. But overseas investment in its bonds will stay limited until they are included in a big global index. This is years, not months, away.
Until then, the yields are not high enough, given concerns about China’s spiralling debt, its currency weakness and the possibility of two US rate rises this year. Apply a currency hedge on five-year debt and dollar investors earn just 2 per cent a year. China’s bond market may be big but investors can still afford to ignore it.