Almost three years after acquiring an 88 per cent share in Spotless Group for $1.3 billion, Downer EDI (ASX: DOW) plans to buy all remaining shares in the company while selling off some of its divisions.
Amidst a planned $400 million equity raising at a 12 per cent discount at $3.75 per share, Downer is cleaning up shop and considering disposing of its hospitality, laundries and mining businesses.
An exit from higher-risk construction markets in Downer's Engineering and Construction (E&C) and Spotless' Infrastructure and Construction (I&C) is already underway, and today the diversified group noted further overhaul plans as it booked a statutory loss of $156 million.
Downer is exiting capital-intensive businesses as part of its 'Urban Services strategy', including exploring the potential sale of all or part of its mining portfolio following recent enquiries from "a number of interested parties".
Mining was one of the few Downer EDI divisions that saw a lift in underlying earnings in FY20, up 3 per cent to $79 million.
The group plans to exit both mining and laundries businesses in the short-term. The latter's earnings fell in half in FY20 to $9 million, but Downer notes it is performing well with hospital volumes returning strongly.
"The sale process has been paused and will resume when investment market conditions improve," the company said.
Hospitality constitutes a very small part of Downer EDI's total business, and the impacts of COVID-19 meant its earnings went from $23 million in FY19 to an underlying loss of $20 million.
"Downer is reviewing the prospects of its Hospitality business to determine which parts of the business will continue, be exited or sold as the future market demand becomes clearer," Downer EDI said.
"In Hospitality all non-critical staff have been stood down or made redundant. Contracts have been temporarily discontinued, exited or converted to cost plus a margin."
The group expects to report an underlying NPATA of $210-220 million for FY20, pushed down by $386 million worth of charges including goodwill impairment, restructuring and portfolio review costs, payroll remediation, legal settlements and historical contract claims adjustments.
Legal payments include the $95 million settlement of a class action launched by Slater & Gordon (ASX: SGH) against Spotless over a profit downgrade in FY16, which occurred prior to Downer EDI's takeover.
The equity raising will take place through a 1 for 5.58 fully underwritten accelerated non-renounceable pro-rata entitlement offer, which is aimed at supporting the acquisition of the remaining shares in Spotless, strengthening the balance sheet, and providing flexibility for continued investment in core businesses.
"We have identified areas of our business where restructuring is required and are taking the necessary steps to exit less profitable markets and contracts and to right-size the cost structure of these businesses," CEO Grant Fenn said
"We are confident that the actions we are taking will make our business more competitive and allow us to drive improved returns going forward."
He said there was a return to more normalised levels of activity across Downer EDI's businesses following the significant disruption experienced during the COVID-19 period to date, including New Zealand which was materially impacted by the Level 4 restrictions in place during FY20.
"Transport, Utilities and Facilities (excluding Hospitality) have been very resilient and are expected to continue trading strongly into the 2021 financial year," Fenn said.
"Downer welcomes the opportunity to move to 100% ownership of Spotless.
"While the Hospitality business has been materially impacted by the COVID-19 pandemic, the core facilities management businesses of Health, Education, Government and Defence continue to perform well."Never miss a news update, subscribe here. Follow us on Facebook, LinkedIn, Instagram and Twitter.
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