Bargain in their backyard

Ah, 2007 – we remember it fondly. The boom times were still rolling, debt was cheap, business was expanding, and the GFC was still the best part of 12 months away.

In the 2007 edition of the BRW Rich 200 (released in May of that year) the total wealth of the list leapt 26.7% to almost $130 billion – and Gina Rinehart had barely started her staggering ascent.

It was also the year that long-time business partners Andrew Banks and Geoff Morgan reached their Rich List peak, with their fortune rising 6% to $315 million, thanks in no small part to the sharp rise in the shares of their recruitment company Talent2.

Morgan and Banks are best known for building the recruitment company of the same name into an Australian powerhouse. They sold the business Morgan & Banks to US giant TMP Group for about $380 million in 1999 and, as Banks spent time sitting on the TMP board, the pair roared back into the Australian recruitment sector with a backdoor listing of Talent2 in May 2004.

Initially, it appeared that the Morgan & Banks magic would rub off on Talent2 as well. Shares in the company would top $3 in November 2007, but as the GFC rocked the recruitment sector, the stock price sunk.

Morgan and Banks departed the Rich 200 list in 2010 around the same time that Talent2 shares dipped below 50c.

But things did improve in line with growth in the Australian economy and the mining-driven skills shortage. By February 2011, the shares were back up over $1.50.

Then came a shock. On December 16, the company released a shock profit warning, telling investors EBIDTA would be $5-6 million in 2011-12, compared with $13 million in the previous corresponding period and well below analyst forecasts for $30 million in EBITDA.

The share price plunged from 99c to 44c. This was partly in response to the downgrade, but also partly because the company chose to pointedly say that it remained “committed to achieving its 2105 goals”. The terribly worded announcement spooked investors, who took it to mean that the next three years were going to be tough, and they sold accordingly.

Clearly the share price fall got Morgan and Banks thinking, leading to today’s surprise announcement that they want to take the company private by paying 78c a share for the stock they don’t own.

Bargain hunting in your own backyard isn’t new. Company founders – especially wealthy ones – always become frustrated with big share falls and quite often they are prepared to get in there and do something about it.

Rich List member Brett Blundy famously privatised his retail empire Brazin after watching the share price sag and there has been intense speculation about whether Billabong chief Gordon Merchant would be prepared to take his baby off the ASX.

The theory is simple. If you can afford it, grab a company at a bargain price, take it private and restructure to unlock value. Then hold the asset or pull off an exit, such as a sale.

The question, of course, is whether you can turn the business around. But Morgan and Banks will be betting that their history in the recruitment sector will make a turnaround possible.

And, in a way, they have been through this before. The pair sold Morgan & Banks to a British firm called Select Group in 1988, only to buy it back later for a fraction of the price when Select hit difficulties.

Of course, today’s bit of bargain hunting won’t please everyone.

Like Morgan and Banks themselves, long suffering Talent2 shareholders will remember November 2007 when the company’s share price was $3. They’ll also remember six months ago, when the shares were trading above $1 before the company’s disastrous profit warning.

While the 78c offer does reflect the company’s value better than the average price of 39c seen over the last month, this is clearly an opportunistic bit of bargain hunting by Morgan and Banks. SmartCompany has already spoken to shareholders who say the price is very cheap given the value locked away in some of the company’s operating units.

Could Morgan and Banks’ move flush out an alternate bidder? That remains to be seen.

But if a superior offer doesn’t emerge, the recruitment sector veterans will have found a bargain in their own backyard and provided a model that other wealthy entrepreneurs could follow.


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