Workforce provider Skilled Group risks making life difficult for itself if it rejects Programmed Maintenance Services' merger overtures, a brokers report suggests.
The proposed deal to create a $700 million staffing and facilities management group has been given the tick of approval by Credit Suisse analysts.
Skilled dismissed the approach as opportunistic last month given the recent 50 per cent fall in its share price.
But the plunge in the oil price, to which Skilled is heavily exposed as a staff and technical services provider, had changed the economic landscape for the worse.
Skilled generated 53 per cent of 2013-14 revenue from the oil and gas sector.
"Given the drop in oil prices, we believe that Skilled's outlook has materially changed," Credit Suisse said in a note to clients.
"In the absence of the proposed merger, we see downside risk to Skilled's share price and earnings from the deteriorating outlook for oil and gas and resources based capex."
The offer would likely need to be increased, the report said, due to pressure from Skilled shareholders whose shares were worth far more six weeks ago.
The proposal is for a merger of equals with both sets of shareholders to own 50 per cent each of a new company.
Excluding Skilled's recent share price weakness, the merger would have likely needed to be a 66/34 split, says Credit Suisse.
Programmed's chairman Bruce Brook said this week the proposal that his chief executive Chris Sutherland would head a merged group was up for discussion.
Programmed argues that its earnings stream is more stable and certain, with more long term contracts than Skilled such as a $270 million 39-year maintenance services contract with the University of Wollongong.
Credit Suisse said the deal would be mutually beneficial.
It would increase Programmed's earnings and protect Skilled from a weak oil and gas outlook, enable $20 million in savings and a more diversified business and revenue stream.
The largest exposures would be oil and gas (26.3 per cent) and government and infrastructure (25.6 per cent).
Programmed's shares were four cents weaker at $2.39 at 1430 AEDT and Skilled was up one cent at $1.545.
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