The Cleanaway Waste Management Ltd (ASX: CWY) share price isn’t reacting much to rumours that it’s about to acquire its largest rival.
Shares in the waste management group dipped 1.3% to $2.21 in after lunch trade as the S&P/ASX 200 Index (Index:^AXJO) gave up a similar amount.
Investors don’t seem to be impressed with speculation that it is closing in on a deal to buy the Australian arm of France’s Suez SA (FRA: SZ1).
$2bn plus takeover spooks the Cleanaway share price
The Australian Financial Review quoted unnamed sources who claim that talks between the two parties were “advanced”.
If a takeover offer eventuates, Cleanaway may need to cough up something north of $2 billion.
Little wonder that shareholders are dumping their shares as Cleanaway will probably need to undertake a sizable capital raising to fund the acquisition.
High risk, high rewards
ASX shares tend to come under pressure at the slightest whiff of a cap raise. This is because companies usually have to sell new shares at a discount to the market to attract fresh capital.
But Cleanaway has another issue if this large acquisition goes through. It will need to bed down the new business without its chief executive Vik Bansal.
Swallowing a large acquisition is challenging even in the best of times. The task will be much more complicated without the captain at the helm.
Chairman Mark Chellew is taking over the reins from Bansal, but he is only the acting captain. Cleanaway is asking would-be capital raising investors to stomach a lot of risk, and they will be wary of the general fact that most acquisitions fail to deliver value.
Cleanaway enters ugly takeover battle front
If walking this tightrope isn’t precarious enough, Cleanaway may be entering into an ugly love/hate triangle.
Suez is fighting off a hostile €11.3 billion ($17.5 billion) takeover bid from fellow French rival Veolia Environnement SA (EPA: VIE). Veolia wants all of Suez, even its Aussie operations, and is threatening legal action to stop Suez from offloading assets.
Then there is the question of whether the Australian Competition & Consumer Commission (ACCC) would bless the marriage between Cleanaway and Suez Australia. The two are major players in the local market.
Foolish takeaway
The AFR reported that Cleanaway controls around 22.7% of Austraila’s waste treatment and disposal services market. Suez’s local arm is the next biggest with 18.3%, according to IBISWorld data.
But if Cleanaway can pull it off, its total revenue and earnings could jump by as much as 50%.
Talk about high stakes poker! Let’s hope Cleanaway shareholders will leave the party with more than the shirts on their back.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.
The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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