Moelis, UBS tapped for Perenti-DDH1 tie up

Perenti and DDH1 plan to combine to create a company with a $1.3bn market value. Picture: iStock.

Perenti’s $300m-plus acquisition of diamond drilling business DDH1 could be the start of more scrip mergers in the mining services space, and it is set to act as a reality check for rivals holding out for more value from suitors.

The fact that Perenti’s shares plunged so much on the news of the deal shows that the market has little appetite for companies to double down in the mining services space, even if a deal may appear to be great value.

Perenti is getting DDH1 for less than the $376.5m or $1.10 per share it listed at in 2020 that came after a number of earlier false starts heading to the market and a discount to initial price expectations.

It is paying a price that when announced, equated to $1.01, offering only $51m in cash overall, or 12.38c per share along with the 0.7111 Perenti shares for each DDH1 share held.

There’s synergies worth $22m after tax, it is growing faster than Perenti, has better margins and rebalances Perenti back to having more exposure to Australia to enable it to capitalise on about $500m of tax losses.

The deal also makes Perenti the largest mining services company in Australia behind Thiess, and it’s market value will only be about $1.3bn

But institutional investors, already jittery in the weaker economic climate, have been turning their backs on mining services providers for some time due to their capital intensive nature.

DDH1 has failed to gain traction, despite being a good business, because it lacks scale.

Obviously, private equity firm Oaktree, which floated the business along with management has decided to take a pragmatic approach as it commits to vote its existing stake of about 20 per cent to the deal.

Working for Perenti is its long time adviser UBS and law firm Johnson Winter Slattery, while Moelis Australia is in the corner of DDH1 along with law firm Clayton Utz.

Meanwhile, despite Perenti’s shares closing down almost 10 per cent on the news, DDH1 shares closed 6.4 per cent higher to 91.5c after they closed on Friday at 86c.

Perenti is understood to have been eyeing targets for some time, but when it comes to its own appeal as a takeover target, buyers are deterred by its $800m-odd debt pile and major exposure to the Africa market.

Perenti shareholders will hold 71 per cent of the merged entity, with DDH1 shareholders holding the remainder.

The deal marks the second major merger for Perenti, with the Perenti business being a combination of Ausdrill and Barminco that merged in 2018.

The new board will include DDH1 chair Diane Smith-Gander and DDH1 director Andrea Sutton, while the business will be run by Perenti’s existing chair Robert Cole and chief exeuctive Mark Norwell.

Already, shareholders and directors representing a combined 38 per cent of DDH1 shares on issue have indicated an intention to vote in favour of the transaction.

Meanwhile, DDH1 said it expected its earnings before interest, tax, depreciation and amortisation for the 2023 financial year would be between $117m and $121m, as flagged in its half year result.

It said softer trading conditions in early January, driven by delayed customer starts, regulatory approvals and wet weather, continued late into the third quarter.

But the fourth quarter had seen an improvement as customer drilling programs restarted.