(Recasts, adds Programmed comment, updates shares)
By Byron Kaye
SYDNEY, Jan 22 (Reuters) - Australian recruiter Programmed Maintenance Services said it still hopes to buy larger rival Skilled Group Ltd and form a A$640 million ($516 million) combined company, after the target unexpectedly rejected its approach.
Skilled on Thursday knocked back the cash and scrip proposal Programmed made over the Christmas break, saying most of the benefits of the deal would be one-off administrative savings and it could grow earnings just as well on its own.
In a sign Programmed may sweeten its offer, chairman Bruce Brook said in a statement that he remains "open to discussions and any suggestions that Skilled might wish to make to effect a merger that would benefit both companies' shareholders".
Brook's response also suggests that, rather than being shut down, Perth-based Programmed's attempt to buy its Melbourne competitor will become more protracted as the country's fragmented recruitment industry undergoes a wave of consolidation.
A week ago, Japan's Recruit Holdings Co Ltd said it planned to buy Australia's Chandler Macleod Group Ltd and another staffing firm for A$360 million.
Skilled's move adds to pressure on it to show it can grow earnings despite dramatic spending cuts in Australia's mining sector, where it has a significant portion of its business. Its underlying net profit for fiscal 2014 fell 5 percent, with the company partly blaming the mining slowdown.
Analysts had largely favoured Programmed's offer, which Programmed said valued Skilled shares at a 21 percent premium to their trading level at that time.
But on Thursday Skilled said that while the offer would create a "larger presence in some industry sectors and provide some diversification, it is not clear that a merged business would be better strategically positioned than Skilled is at present".
Programmed's proposal undervalues Skilled and its contribution to a merged group, Skilled said.
Skilled shares, which hit a four-year low of A$1.04 shortly before Programmed made its offer, fell 5 percent to A$1.43, while the broader market rose. Programmed shares climbed 0.4 percent.
$1 = 1.2392 Australian dollars Reporting by Byron Kaye; Editing by Stephen Coates