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Mitie offloads weak property division

The deal was a rare piece of good news for the outsourcer in a horrible month for the sector
November 22, 2018

After a barrage of profit warnings, concerns over mounting debt and numerous exceptional charges during recent years, investors in Mitie (MTO) were given some relief this week after the outsourcer announced the sale of its underperforming social housing business to Mears (MER). 

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Under the deal, Mears will buy specific assets and contracts from Mitie’s property management division, paying an initial consideration of £22.5m and a deferred consideration of up to £12.5m, subject to earnings targets. Mears’ management said the deal would strengthen its position in the social housing sector, adding 14 branches to the UK network. The acquired business has continuing revenues in excess of £100m annually and a secured order book worth around £200m between now and 2024.

Analysts' reaction to the deal was broadly positive, with many noting it made sense for both parties. Peel Hunt trimmed its 2018 adjusted pre-tax profit estimates for Mears by 8 per cent, although increased them for future years as synergies and operational improvements drive margin improvements. The deal is expected to complete at the end of the month.

Mears is funding the initial cash consideration through an accelerated bookbuilding process, which broker Liberum expected to be equivalent to an 8 per cent dilution.

Mitie has been looking to sell off non-core businesses as part of its turnaround strategy. Management tried to sell the property management business in 2017, but withdrew it after failing to secure sufficiently high bids.

The property management business saw declines in both revenues and operating profits during the year to March 2018. More recently, a pre-close statement ahead of the half-year numbers blamed “softer performance” in the social housing division as one reason for a disappointing operating profit performance.  

Despite the challenges in the business, Mears is betting it can make it work. Operating losses and mobilisation costs will eat into the group’s earnings in 2018, but management expects the deal to be earnings-accretive in 2019. The board is formulating a recovery plan and cited its experience turning around Morrison Facility Services as a reason for confidence. The deal announcement followed a week of bad news for outsourcers, and investor fears over the health of the sector may have played into Mears’ negative share price reaction on the day the deal was announced. 

Shares in Interserve (IRV) fell to their lowest level in more than 30 years last week, after the market got wind of fresh problems at an energy-from-waste scheme in Derby, revealed in the half-year results of joint-venture partner Renewi (RWI). The sell-off was also fuelled by reports that the outsourcer had not stuck to agreed payment terms on the significant majority of its recent bills, and that some suppliers and contractors will no longer take its business. Interserve said in a statement that its turnaround strategy was progressing in line with expectations, and it remained on track to grow profits this year.

Meanwhile, Babcock (BAB) revealed a £120m exceptional charge from restructuring and disposals in its latest half-year results, and more than doubled the forecast revenue impact from the end of its Magnox nuclear decommissioning contract. Earlier this month, Boatman Capital Research, a previously unknown and seemingly unregistered research firm, released a highly critical – and highly disputed – note on the group. The research prompted a sharp fall in the share price, which only worsened when Babcock announced it would shut its Appledore shipbuilding facility in Devon.