\n\tBy Greg Peel<\/p>\n
\n\tWhat?<\/u><\/p>\n
\n\tWhile not without possible impediments, a full takeover of Forge Group ((FGE<\/span>)) by 33% owner Clough<\/span> Ltd ((CLO<\/span>)) is a possibility DJ Carmicheal<\/span> finds compelling for a number of clear reasons with the potential for a significant premium to be paid.<\/p>\n \n\tWhy?<\/u><\/p>\n \n\tForge Group provides engineering, construction and maintenance services to the mining and energy sectors in Australia and Ghana. It is 33% owned by Clough<\/span> – a company of similar profile with exposures in Australia, South-East Asia and the US. Clough<\/span> recognises<\/span> the Forge stake in its accounts but is only a beneficiary of the investment through dividends paid. Clough<\/span> does not, notes stock broker DJ Carmichael, have any access to or enjoy any benefit from the significant cashflows<\/span> Forge's business generates.<\/p>\n \n\tHow much might Clough<\/span> be prepared to pay for these valuable cashflows<\/span>? Well, DJC<\/span> estimates that on an enterprise value over earnings basis, Clough<\/span> is currently trading at a premium to Forge of some 83%. This provides room for Clough<\/span> to pay a stiff control premium that would still imply significant earnings accretion. And it's not like Clough<\/span> doesn't have the funds. The company was sitting on $63m<\/span> in cash at end-FY11<\/span> and will be bagging around another $50m<\/span> once the sale of its marine construction business is settled. <\/p>\n \n\tIn March this year Forge announced a board and management transition and a new CEO is expected to be announced soon. Over time the outgoing Forge directors have been quietly offloading<\/span> their shareholdings<\/span>, as have some early investors, such that the company's share register is now wide open. DJC<\/span> notes the second largest holding (beyond Clough<\/span>) is only 3.6%.<\/p>\n \n\tAll of the above provides reason enough for DJ Carmichael to see a compelling takeover possibility.<\/p>\n \n\tWhy Not?<\/u><\/p>\n \n\tDJC<\/span> also notes, however, some potential impediments. Clough<\/span> itself is 62% owned by South African construction contractor Murray & Roberts Holdings and that company has been facing some liquidity “issues” of late. Clough's<\/span> own CEO is also a newbie who took over the office early this month and DJC<\/span> admits he may not want to entertain such a significant transaction five minutes in.<\/p>\n \n\tThere have also been rumours<\/span> Clough<\/span> itself might be the target of takeover which might then delay any corporate action over Forge.<\/p>\n \n\tEither way, DJ Carmichael is content to believe that ultimately something is going to happen, and whatever that something may be it will be beneficial to Forge shareholders.
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