Downer EDI's $1.3 billion bid for services company Spotless caught everyone by surprise except, perhaps, Tim Mann.
The Morningstar analyst was the only one of those covering Spotless to have a buy recommendation on the unloved conglomerate.
A few weeks ago Mr Mann slapped a $1.15 per share value on them together with a "buy" recommendation. On Tuesday his stance has been vindicated as Downer emerged as a bidder seeking control with a takeover offer pitched at that exact same price.
Those who followed his advice would be well pleased after the Downer bid sent the company's shares flying up 45 per cent on Tuesday by mid-afternoon.
For Mr Mann, the trigger to upgrading Spotless shares to "buy" from "accumulate" was the decline in its share price, as investors continued to sell down their holdings after poor interim earnings. All of the analysts who follow the shares had either "sell" , "underperform" or at best "neutral" recommendations, apart from Morningstar.
Mr Mann argued Spotless would add as much as $35 million to earnings as unprofitable contracts were exited, which could take around 18 months with "earnings to recover sharply in 2019".
And contractor Downer EDI agrees, with its bid valuing Spotless at $1.3 billion.
One of the harshest critics, Citi, told its clients in late February that Spotless shares were "high-risk" as it slashed to 79¢ from $1.07 its price target for the shares.
"A series of earnings misses, deteriorating debt optics, its concentration of offshore ownership and the risk that the recent iteration on strategy, whilst logical for future earnings, may not be delivered in the time frame or to expectations set out by management at the 1H17 results," was cited for the downgrade.
"Although achieving the stated transformation objectives of contract portfolio rationalisation, margin improvement and a pathway to eventual reduction would be welcome, we expect that strategy delivery will be the necessary catalyst rather than just apparent strategy credibility."
Despite its tough assessment, Citi has now been tapped by Spotless to help defend the target from the unwelcome offer received from Downer EDI.
Downer went into the market on Monday, building a 19.9 per cent stake. Its offer at $1.15 a share in cash is a significant premium to the target's share price of 72.5¢ at the close on Monday.
News of the planned bid pushed Spotless shares ahead by 49 per cent to $1.08 on Tuesday afternoon. Spotless told shareholders to take no action in relation to the offer.
To help fund the offer, Downer EDI is going to its own shareholders with a two-for-five share issue, which is priced at $5.95 – a hefty 20 per cent discount to its last traded price.
In pitching the offer, Downer said buying Spotless would help to broaden its offering in the facilities and asset management services sector while also reducing its exposure to the resources sector, where the recovery is patchy.
Spotless generates the bulk of its earnings from servicing government and commercial facilities, although the drawback for bidders has been its exposure to laundry and linen services, which are capital intensive and low margin.
Downer EDI said the purchase would be earnings per share accretive and while the combination of the two businesses is expected to deliver pre-tax cost synergies of approximately $20 million-$40 million a year, this is expected to take time to emerge, it said.
"The Downer management team has what it takes to turn the Spotless business around and to create a highly competitive, customer focused and successful service organisation," Downer chief executive Grant Fenn said.
"This is a strategically and financially compelling transaction with the potential to deliver growth across the combined portfolio and drive shareholder value."
In a statement, Spotless said it noted the takeover offer is "highly conditional, with conditions including a minimum acceptance of 90 per cent, no change in Spotless' earnings guidance provided in February 2017, regulatory approvals" and the like.
"The board of Spotless advises shareholders to take no action in respect of Downer's takeover offer," it said.
Spotless chairman Garry Hounsell said the offer will be studied in due course.
"We will assess any proposal in the context of our announced strategy reset, including the recently announced contract portfolio restructure, which is expected to be a material driver of growth and enhanced future performance," he said.