You can now pick up its shares for one-third less than its suitors offered.
Mouchel (LSE: MCHL), the embattled support services group, announced on Tuesday that it had rejected not one but two offers the company. It also revealed downbeat interim results that won't help disappointed shareholders sleep at night.
Mouchel's shares are down 34% as I write. In contrast, the price of the smaller bidder, Costain (LSE: COST), is up 3%, presumably on relief that a risky bid may be shelved. The second interested party, the larger Interserve (LSE: IRV), saw its shares shuffle down 1%.
Either Costain or Interserve might yet proceed with a hostile bid, although the latter claimed on Tuesday morning that it will now concentrate on own expansion plans. For regulatory purposes, Mouchel remains in an offer period.
While Mouchel admits trading conditions are tough, it seems almost gung ho about the longer term. In rejecting the two bids, it claimed:
"In the medium and longer term, the outlook for Mouchel is compelling. We are confident that our focused strategy, established market position and our leading role in transforming essential services and sustaining vital infrastructure underpins the outlook. In an environment where all of our clients are facing the challenge of delivering higher quality services more efficiently, it is clear that our skills will be increasingly in demand."
Unprofitable business
Well, to paraphrase the immortal words of Mandy Rice-Davies, they would say that, wouldn't they? Looking at the interim results, it's difficult to be so sanguine.
The good news came back in January, when Mouchel announced it had refinanced £170 million in banking facilities until 2014.
The bad news is it will certainly need them.
First-half revenues slumped 13% to £270 million. Underlying operating margins fell to just 3.3% from 6.3%, and underlying operating profit more than halved to £9 million. Take exceptional costs into account, and Mouchel posted a statutory loss of £1.5 million. There's no dividend, either.
The reality is the immediate future for Mouchel is all about avoiding going the way of doomed support services groups such Rok and Connaught Group, which both crashed from the FTSE 250 into administration last year.
Cutting costs is clearly important. Mouchel says it has achieved staff cost savings equivalent to an annual £32 million -- ahead of the £25 million it targeted.
Keeping lenders happy will also be critical, even after the refinancing. The company is looking to dispose of non-core assets to reduce debt, and says net bank borrowings over the period of £97 million compares favourably with the £116 million figure last year. But net borrowings are still up £13.5 million on 31 July.
Also, while average bank borrowings across the half were £111 million, compared to £124 million last time, it seems borrowing has simply followed revenues down, presumably as a result of reduced working capital requirements. If the company did no business it would have no need for working capital, but that would hardly be a cause for celebration!
Death by a thousand cuts
So what about that future business?
As you'd expect, Mouchel's interim results go into pretty exhaustive detail about its various operating units and its contract wins. Sector watchers will have a field day, but what comes across is a company reliant on the public sector at a time when government spending is famously retrenching.
To pick just one example, the critical Highways division saw revenues fall 22% to £96 million over the comparative period, with underlying profit diving 82% to a paltry £2 million. Mouchel says it is reducing costs in the unit, and it talks of work being deferred rather ditched -- believable for anyone who has navigated the bumpy roads near my house. But how profitable will such future contracts even be, given the huge emphasis on paring down public spending?
Also, the order pipeline of £1.6 billion sounds good, as does the bidding pipeline of £2 billion. But similar opaque numbers turned out to be cold comfort for investors in Rok and Connaught.
One for risk takers only
The worry for Mouchel shareholders is that neither Interserve nor Costain saw enough value in the company's books to table a winning bid. On the contrary, both effectively reduced their valuation after doing their due diligence.
True, at 135p and 155p respectively, both offers still value Mouchel at much more than £1 or so shareholders will get for their shares as I write.
But it would be reckless to assume this discrepancy means Mouchel shares are therefore a steal. Those bids took into account the synergies of bringing Mouchel and its contracts within the fold of a larger group. There is greater security in scale in the current climate, and an independent Mouchel should be priced at some discount.
If Mouchel prevails -- or if another bid emerges -- shareholders may do very well from what looks like an overly-depressed level. But while it may prove overly cautious, I'd continue to favour the stronger players in the wider sector, especially founder-led Morgan Sindall (LSE: MGNS).
More from Owain Bennallack:
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