21 mar 19

Eclipx - McMillan Shakespeare merger off?

Australian fleet management group Eclipx (ASX:ECX) continues to suffer with the proposed merger to McMillan Shakespeare (ASX:MMS) being called off. Following a trading halt on Monday, Eclipx announced a profit downgrade of more than 40% for the first five months of FY19 with the deterioration having worsened since February. Eclipx had requested a 14 day extension to the merger but MMS advised that “despite every effort having been made by McMillan Shakespeare to understand the issues facing Eclipx, we do not believe it will be possible to complete the proposed scheme.”

Market Reaction

Following the announcement, Eclipx shares re-open to a punishing market response, dropping over half their value to open at AUD$0.86 on Wednesday after trading at AUD$1.88 the previous Friday. Since then the decline has continued with ECX closing at AUD$0.73 today. The shares were trading at close to $4.00 a year ago. McMillan shares rose on the news, picking up over 4% to close at $12.73 on Wednesday but have since dropped back to pre-announcement prices.

The source of the problem

Eclipx’s difficulties can be attributed to the online auction business Grays and the loan car business Right2Drive. Grays is suffering from a downturn in the insolvency and Industrial business, but the troubles at Right2Drive are more complex. They include “softer trading conditions”, “a re-assessment of recovery rates on some debtor groups” and “process errors”. One industry source has said that he’s “not surprised” that these areas are causing difficulty. “The Gray’s acquisition in 2017 was part of a diversification strategy and while that sounds good on paper, the problem is that it’s not really within their core competency. There has been a lot of trouble integrating the business and realising profits.”

A new suitor?

In October last year, Eclipx rejected an offer from SG Fleet (ASX:SGF) but industry sources are saying that a reboot of that deal is unlikely without some extensive new negotiation. Shares of both companies have dropped since then although SG has not suffered as badly.

Article authored by Shane Curran