Guest Pitch: Empresaria Group (EMR:L)

Merger Arbitrage: 48% Upside (at 42p)

This idea was shared by Jerry.

This is an odd merger arbitrage setup in the UK: a strategic review is ongoing, triggered by major shareholders who are clearly eager to sell. Two bids have already been received, and the potential upside on the latest one stands at 48%. As the spread size suggests, the risks involved are not insignificant. The downside could be steep (up to 40%), and the current bidder has limited track record. The stock trades on LSE’s AIM market, and the liquidity is extremely thin.

Empresaria Group is a global provider of specialist staffing services. It has recently received a 62p/share takeover offer from Legacy UK Holdings. Management has indicated willingness to recommend the offer and has already granted due diligence access. Shareholder approval is virtually guaranteed, as 70% had agreed to accept a lower proposal from another bidder just a couple of months ago. The main risk is that the current buyer could walk away. PUSU date has been set for August 27.

The whole takeover saga began in May, when EMR received an unusual bid from another party – a consortium made up of Peter Gregory, Nigel Marsh, and Ashok Vithlani. While I have no idea who the latter two are, Peter Gregory is a long-time HR executive who, after retiring, seems to have gone shopping for businesses where he could put his experience to use. The offer consisted of 10p/share in cash + 50p/share in unsecured notes, convertible to cash in three years after closing. Management called the bid too low, but acknowledged that the main EMR shareholders had become aware of it and had instructed the board to explore strategic alternatives.

EMR granted the consortium due diligence access in hopes of getting a better price and at the same time began shopping the company to other parties. Over the next several months, the PUSU deadline was extended 2 times. Till July, 70% of EMR shareholders entered into support agreements for the consortium’s proposal, including the company’s largest holder, Tony Martin, a retired ex-chairman with a 28% stake. That level of shareholder support was surprising, especially since management had previously dismissed the price as too low.

The market remained skeptical, either because the deal was seen as unlikely to close, or because most of the consideration came in unsecured notes rather than cash. EMR stock spiked to 35p following the bid but then gradually drifted back to pre-announcement levels of 25p.

Then, on July 30, the consortium withdrew its offer, stating that EMR had only provided about 20% of the requested due diligence materials, which was not enough to secure financing. They noted, however, that they had still expected another extension of the PUSU date to continue negotiations. But just before the deadline, EMR made it clear that no further extensions would be granted. As it turned out, EMR had probably been in talks with the new bidder for some time – this would explain why the consortium with an inferior proposal was not granted all of the required due diligence materials.

Immediately following the consortium’s withdrawal, EMR announced the all-cash offer of 62p/share from Legacy UK Holdings, emphasizing that based on the ongoing strategic review, the 62p bid “represents the highest value currently on offer to shareholders.” Due diligence is underway.

There is very limited information on Legacy UK Holdings. It appears to be a UK-based vehicle linked to the Indian Khanna family (see their LinkedIn profiles here and here). They own hotels in India and have stakes in some mining operations, though details are limited. However, they have no evident background or track record in the recruitment sector, making their sudden interest in the company unclear.

The only factor supporting the credibility of Legacy UK bid is that EMR’s management chose to abandon the consortium’s offer—even after it had gained 70% shareholder support—in favor of this new, seemingly superior all-cash bid. I think that the current almost 50% spread more than compensates for the buyer risk. Also the consortium could still come back to the negotiations/due-diligence if the acquisition by Legacy UK fails.

EMR background

EMR focuses primarily on IT, healthcare, and professional staffing. The company has become a takeout target amid a significant business downcycle that began in late 2022. As recruitment in healthcare sector normalized after COVID, the 2021-2022 tech hiring boom cooled, and interest rates rose, the company’s financial performance has steadily declined.

The downturn appears to be stabilizing. However, management expects weak conditions to persist through this year, and calls this the longest downcycle of their careers. EMR has also launched a turnaround plan, shedding non-core operations in the EU and APAC and focusing on its strongest segments in the US, UK, and Offshore (which involves recruiting workers in India and the Philippines for remote roles in Western markets). All divestments are expected to take several years.

The 62p offer values EMR at 12x 2024 adjusted EBIT and 21x adj. profit before tax. So it doesn’t look very cheap on today’s earnings. However, those earnings are depressed: last year’s adj. PBT was just £2.2m, while in the pre-downcycle years of 2018–2022, average adj. PBT was £8.7m. Even though EMR intends to divest certain businesses, it’s not difficult to see why the buyers would be interested in the potential turnaround play here.