John Menzies (LSE: MNZS) and DX (LSE: DX) have both had their fair share of problems over the past year, but it now looks as if the two groups have finally stumbled on a solution to their problems by seeking to work together.
Specifically, managements announced this morning that the two firms are in talks regarding the possible sale of John Menzies’ distribution division. DX is proposing to buy the division off Menzies for £60m in cash and the issue of new shares representing 80% of its issued share capital after the deal closes. The cash consideration of the deal will be financed by new borrowings of the enlarged group.
A good deal?
The deal looks on paper to be a sensible decision. Based on a preliminary joint assessment, the boards estimate that the combination would generate cost synergies in the range of £8m to £12m per annum — a sizeable figure compared to the acquisition price.
However, after the deal closes, it seems John Menzies’ shareholders will end up owning DX, which may not be a favourable outcome considering the company’s past mistakes.
Under the terms of the deal, it is intended that the balance of the new DX shares issued to fund the merger will be issued to Menzies’ shareholders pro rata their holdings at the relevant date. On this basis, current DX shareholders would own in aggregate 20% of DX’s issued share capital with 75% of the company owned by Menzies’ investors. The remaining 5% of the group will be given to Menzies’ defined benefit pension scheme to meet pension obligations.
Still, on the face of it, this deal seems to make a lot of sense for DX’s investors. By combining with the distribution division, DX should be able to cut costs significantly and improve profit margins to turn around its operating performance. The company has been blighted by operational problems during the past year, and losses have ballooned.
Plenty of problems
Alongside today’s merger proposal, DX also announced its interim results for the six months ended 31 December 2016 this morning, revealing a loss before tax of £29.3m and an adjusted profit before tax of £0.6m, down from £2.4m for the same period a year ago. The company continues to restructure to improve returns and drive revenues, and it seems that the Menzies deal is part of this. But whether or not it will turn out to be a sensible acquisition in the long term is not clear.
Considering the operational issues DX has reported over the past year, I’m sceptical of whether or not management can successfully integrate Menzies’ distribution business without any further problems. That being said, with the deal structured as it is, if DX can’t manage with the larger operation then Menzies could easily swoop and acquire the rest of the business it does not already own. All in all, the deal looks to make sense on paper but it remains to be seen whether or not DX’s management can successfully pull off a merger of this size.
