Van hire company Northgate (NTG) has agreed a deal to take over roadside support firm Redde (REDD) in an all-share merger worth just under £400m.

Northgate hires a vehicle fleet of around 100,000 vans and trucks across the UK, Ireland and Spain. The plan is to combine it with Redde's own 10,000 fleet of vehicles, plus access to 50,000 more through rental partnerships.

Redde shareholders will get 0.37 new Northgate shares for each Redde share they hold, equating to roughly 128p per share. That's an 18% premium to last night’s closing price for Redde stock at 108.6p.

The share-for-share deal will see Northgate’s shareholders own 54% of the combined company – which will be called Redde Northgate – with Redde’s shareholders owning the other 46%.

SCEPTICAL MARKET

Judging by today's respective share price moves it seems clear which set of investors believe they are getting the better of the deal.

Northgate shares slumped more than 7% to 325p, half their level of five years ago. In contrast, Redde rallied 3% to 111.8p. That Redde's stock remains more than 12% below the implied 128p deal value may suggest obstructions to a final agreement.

It might equally mean that investors are betting that the pairs’ problems are unlikely to halved by being shared since seldom does a robust and successful business emerge from the combination of two struggling ones.

DECLINING OPERATION

It comes as Northgate also released half year results to 31 October 2019 showing falling revenue and profits, plus increased net debt.

Revenue dropped 4.3% to £357.8m while pre-tax profit slumped 13.8% to £24.8m. Net debt rose 5.2% to £504.6m as the firm continued to spend on growing its vehicle fleet.

Northgate puts falling profits down to restructuring in the UK and Ireland in a bid to improve operational efficiencies and competitiveness.

It is interesting that the company, which has been running a strategic review of its operations for a while, seems to think it has found at least part of a solution in the proposed tie-up with Redde, a business that saw its own share price collapse in February.

RATIONALE FOR THE DEAL 

Northgate’s non-executive chairman Avril Palmer-Baunack believes that the merger has ‘compelling strategic logic’.

This seems to stem largely from the idea that scale will bring extra flexibility both for the company and its customers across the auto services value chain. More compelling may be the ‘significant cost synergies and opportunities for revenue cross-sell’ that the boards of both firms claim to have identified.

‘This merger represents an attractive opportunity for both companies to further enhance their market-leading positions, delivering synergies, customer benefits and shareholder value’, said Palmer-Baunack.

Redde chief executive Martin Ward will become chief executive of the combined company with Northgate CEO Kevin stepping down from his role with immediate effect.

 

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Issue Date: 29 Nov 2019