A brighter Billabong outlook

The appearance of a new mystery bidder at Billabong presents upside … but there’s no bid on the table.

PORTFOLIO POINT: Another private equity bidder for Billabong would be welcome news, but so far there’s nothing new on the table.

Billabong (BBG)

Thus far, I’ve been reluctant to buy into Billabong, but the situation has now changed and there could be some gains here.

When it was first announced that private equity group TPG had come back with a $1.45 indicative bid, the stock was trading at around $1.40 and had recently drifted back into the $1.20s. I recommended staying away because there was only one bidder, they hadn’t made a formal bid and the company was not a business I wanted to own in the absence of a bid.

What’s changed is another bidder has appeared. I think it’s Bain, another private equity firm, but I don’t know and it hasn’t been formally announced, so investors should be cautious. What is interesting is they’ve only indicated the same price as TPG.

There is still no formal bid on the table, though. People who are optimistic about the situation now expect both companies to do due diligence and then decide how much they really want to or can bid.

So although the stock has risen – it closed today at $1.42 – I think it’s probably now worth buying for several reasons. Firstly, there are possibly two competing private equity bidders. Secondly, with two private equity bidders and the very high likelihood that the stock will be taken off the table, the chance of an industry bidder now appearing is a lot higher. No industry bidder has appeared, but an industry bidder would probably pay a lot more than a private equity bidder.

The situation is not without risk because neither bid is formal at the moment. Both bids are conditional upon due diligence, but where you have two players it’s a much better situation than one.

Consolidated Media Holdings (CMJ)

The press around this deal has been a little confusing, with some saying there’s been an increase, and some a decrease. The original bid has been firmed up, post-due diligence, and News Corp’s $3.50 a share cash offer has become $3.45 plus a 6c fully franked dividend.

That means the bid has arguably been increased to $3.51, plus one or two cents of franking credits.

There are a couple of problems for investors though: firstly that Kerry Stokes – who owns roughly 25% of Cons Media – mightn’t accept the bid at that price, and secondly that there’s not much upside on the share price to make that risk worthwhile.

Cons Media closed today at $3.42, and the indications are that James Packer, who owns 50%, is happy with the bid price whereas Stokes reckons he should get more. Stokes and Packer are friends, and Packer needs the money in order to further his Echo Group ambitions (see below), so that may sway him.

Normally you can’t give one shareholder a benefit that other shareholders don’t get, however if they do this via a Scheme of Arrangement, which they will do, then it might be possible. If you specifically put in the scheme that Kerry Stokes gets some special benefit in terms of programming or content sharing, then as long as the other shareholders agree it’s no problem. No other shareholder is interested in content or program sharing or whatever else it might be, so it would be no major hurdle – the other shareholders just want the cash.

I think chances are this deal will all go through, but I don’t think it’s one to buy into because the price isn’t likely to change and whatever is used to get Stokes to sell will not be made available to other shareholders.

On the pending ACCC decision as to whether Stokes can counterbid for Cons Media through Seven Group (SVW), the media regulations are a bit vague. Even if he did get approval, and fork out to buy it, he still wouldn’t control Foxtel, whereas News Corp would. I think the most likely outcome is that he does a deal with News Corp for whatever it is that he wants and then just accepts the deal. For him to turn around and buy it would cost him a lot of money at the moment and I’m not certain he really wants to do that, and that’s not really his style to do things that way; he likes to merge his businesses with others and let control flow to him, he just doesn’t like to pay up with a lump of cash.

Echo Entertainment (EGP)

It looks like James Packer’s Crown (CWN) is very close to getting the regulatory approval to lift its Echo stake up to an eventual 25%. Crown currently has 10%, and Malaysian group Genting also owns just under 10%.

It hasn’t been formally announced, but from what I hear they will get it, which is not a surprise, given that Crown is already a big casino operator in Australia; it’s unlikely that for regulatory reasons they wouldn’t be allowed to own other casinos.

As soon as the Consolidated Media deal comes off, that means Packer has a billion dollars he can funnel through Crown, and Crown can use that money to buy more of Echo.

Echo is still on my list as a good potential target, however it’s already too expensive. It’s one I recommended buying a while ago, and it’s gone up since then. Every time the share price goes up, it’s harder to keep buying it, because in the absence of this potential corporate activity, Echo is probably overpriced.

Alesco (ALS)

This one has become very messy, and I’ve been saying I still think it’s a sell. Anything you pay above $1.90 now is purely for franking credits and I wouldn’t be paying up just for that.

We’ve seen this weird situation last week where Alesco, as a target, has created its own acceptance facility. So you’ve got a Dulux acceptance facility and an Alesco acceptance facility. I don’t recall a takeover where the target’s had its own separate acceptance facility from the bidder, so it’s very odd.

Then Dulux has said it will go unconditional if it gets above 50%, and at the moment it’s at about 44.3% or 44.5%. Dulux has said it would like to pay a total of 42 cents in fully franked dividends, but can only do that if they get to 90%. So, if you get to 50% acceptances there’s no more dividends, it’s just the $1.90 per share plus the 15 cents you’ve already been paid. But if Dulux gets to 50%, effectively it’s got control, and it’ll probably get to 90%.

The point is, even assuming this deal goes ahead – which is not certain, but it’s likely – I don’t think there’s much in it.

Sundance (SDL), Fortescue Metals (FMG)

Looking at iron ore in general – obviously the world has changed.

Fortescue last week talked about “price volatility”, which is code in the stockmarket for “prices are going down”. When prices are going up, we say they are, but when they go down they’ve just become volatile, because volatility implies that maybe they’ll go back up again.

Now there’s speculation today that Gina Rinehart and Fortescue should combine their operations; well, good luck. Yes, they should, because they’re competing for the same financing and the same customers, but the problem is Rinehart is notoriously secretive. She doesn’t like her private life being on display, has never operated in a listed environment and unless things are really dire I can’t see it happening. Look at the battle she had with her own children as shareholders – try to imagine what it would be like to have to deal with the general public and fund managers and Andrew Forrest and everybody else who would emerge as part of the merged entity. I just can’t see that happening.

Then there’s Sundance, and I’ve said many times in the past: stay away from Sundance. Hanlong came back, recut the bid from 57c down to 45c, and I think there’s every chance it will walk away again. Given that they have already walked away once from a negotiated bid in the face of falling iron ore prices, and that prices since then have fallen a further 20-25%, it seems to me that they won’t hesitate to do it again. Sundance shares have traded down to 26.5 cents, and I think there’s every chance this deal will fall through.

ClearView Wealth (CVW)

Last week we talked about the bid being raised to 55 cents, and now there’s an extra 4c of dividend.

Firstly the bidder has allowed investors to keep the regular dividend of 1.8c in addition to the 55c bid, then it added on a further 2.2c a share.

Last week the stock was trading at 58-59c, so the market was anticipating this, and the stock has gone ex-dividend 1.8c, but it still has another 2.2c to be paid on top of the 55c, so you’ll get a total of 57.2 cents, plus a very small amount of franking credits.

I think it’s good buying now up to 56c, but again this is a deal where there’s never been much in it for the average punter.


Tom Elliott, a director of Beulah Capital and MM&E Capital,may have interests in any of the stocks mentioned.

Takeover Action September 3-7, 2012

DateTargetASXBidder(%)Notes
7/09/2012AlescoALSDulux Group45.46Ext to Sept 11
4/09/2012Clearview WealthCVWCrescent Capital Management59.50
23/08/2012Exco ResourcesEXSWashington H Soul Pattinson19.90
7/09/2012Hastings DiversifiedHDFAPA Group22.90Recommends offer
24/08/2012Hastings DiversifiedHDFPipeline Partners8.75
20/08/2012MinemakersMAKUCL Resources3.29
5/09/2012ENKENKDMCI & D&A Income60.70
7/09/2012Plan B GroupPLBIOOF Holdings61.80
29/06/2012Real Estate Capital Partners USA Property TrustRCUWoolley GAL II32.81Incl associates' holdings
4/09/2012Rocklands RichfieldRCIShandong Energy89.85Pre-bid agreement
7/09/2012Thakral HoldingsTHGBrookfield Asset Management78.81
5/09/2012United OrogenUOGIron Mountain Mining74.03
Schemes of Arrangement
24/07/2012Billabong International LtdBBGTPG International Llc0.00
7/09/2012Consolidated Media Holdings LtdCMHNews Ltd0.00Binding proposal
6/08/2012Integra Mining IGRSilver Lake Resources0.00Vote late Nov
2/08/2012Sundance ResourcesSDLHanlong Mining Investment17.99To complete in Nov 2012. 
Foreshadowed Offers
5/09/2012Billabong International LtdBBGAnother party0.00Non-binding indicative proposal
16/08/2012Goodman FielderGFFWilmar International0.00Goodman denies  speculation.
21/05/2012PMPPMPTMA Group0.00Non-binding indicative offer
27/07/2012Real Estate Capital Partners USA Property TrustRCUSaban Capital Group0.00Non-binding indicative proposal
24/08/2102Whitehaven CoalWHCTinkler Group0.00Not proceeding