A chance to collect 19%

PORTFOLIO POINT: The takeover of Ludowici looks set to go through, and there’s an opportunity for investors who can get in at the right price.

Ludowici (LDW). If there is one deal likely to get up right now, it’s Danish cement group FLSmidth’s friendly $7.20 a share cash bid for Ludowici.

The bit that piqued my interest was that on the right figures, you’re going to get a 19% internal rate of return (IRR), a concept I’ve explained before (see Your profit stopwatch).

Basically, mining technology provider Ludowici is not a big or liquid company and the $267 million bid is conditional on due diligence. Because of this the shares are trading between $6.76 and $6.80 (today they closed at $6.80), so if you got the shares at, say, $6.77, and the deal does take the expected four months to complete, then your annualised rate of return is 19%.

Every sign points to this friendly bid being completed by May: the Ludowici family has put its 22% shareholding behind the offer and the board is recommending it, there’s a break fee to be paid if it all comes to nought, and a no-shop clause (even though that just means the board can’t go out and solicit bids – uninvited higher offers are always welcome).

The board and family would not have put their necks on the line if they thought there was anything in the due diligence that could sour the deal, but every now and then takeovers are derailed when the suitor finds something they don’t like in the accounts and this is the risk that’s being priced into the shares.

Perhaps the most important indicator of all is that it’s being done via a scheme of arrangement. For friendly bids this is a good way of lowering the acceptance level to 75%, versus the 90% required in an off-market proposal.

The other advantages are that it means nothing is left to chance – you don’t want to be held to ransom by someone buying a 12–15% blocking stake – and you don’t have to buy shares and face the possibility of owning a rump stake if it falls through. This of course can also be a disadvantage, because if someone else comes in over the top with a higher bid your scheme is blown out of the water and you can’t make a profit on any shares already accepted into the takeover.

For a small investor it’s not a bad one to play. The bid, less a dividend of up to 20¢, is a 106% premium to Ludowici’s shares and has unanimous support from the major shareholder and board. Large funds can’t get onto the register because the company is too small, and therein may lie the opportunity.

Maryborough Sugar Factory (MSF). Mitr Phol’s $$4.45 a share offer for MSF is an example of why you’d use a scheme of arrangement in a friendly bid.

Thai company Mitr Phol decided in favour of taking acceptances in an off-market offer rather than use a scheme of arrangement, and the acceptances aren’t flowing. As of Friday only 28.64% of the MSF register had vended their shares into the bid, whereas if they’d used a scheme the investors would have had to make a decision one way or the other during a vote at a shareholder meeting.

The latest news is that MSF CEO Mike Barry has just had his contract extended. He was supposed to leave on January 31, but because the process is going so slowly he’s being kept on. It’s common sense on the part of the board too because if the deal doesn’t end up being completed, MSF will need a CEO to take charge again.

Still, I think the deal will go ahead. People have to be prodded a bit to take any action and it doesn’t help that many of the shareholders are also growers. To them, the relationship with the mill and the price they get from the company for their product is just as important as returns from the shares, and they have to be convinced that Mitr Phol is going to treat them as well as they’ve experienced in the past to accept a change of control.

Ivanhoe Mines. Rio Tinto has finally taken majority control of dual-listed Canadian miner Ivanhoe and is focused on getting a direct piece of the action in the Mongolian copper and gold mine Oyu Tolgoi.

Sadly for Ivanhoe shareholders in Australia and Canada, Rio’s clever use of creep provisions in Canada mean they’ve been denied a takeover and a premium for their shares.

A poison pill clause designed by Ivanhoe to prevent Rio from gaining majority control of the company was cancelled last week, after which the Australian miner crept up to take a 51% majority stake. News reports suggest Rio is planning to overthrow the board, push out founder Robert Friedland (whose relationship with Ivanhoe’s major shareholder is testy at best), and spin off the assets it doesn’t want.

Canada seems to have the same creep provisions as Australia that allow major shareholders with a 20% stake to creep up the register by 3% every six months. It looks like Rio has cleverly exploited these rules and successfully taken control of Ivanhoe without having to pay a premium.

Kresta Holdings (KRS). A year after the boardroom show-down between now-ex chairman Ian Trahar and major shareholder Hunter Hall, there is movement on Kresta’s share register that, in any other situation, I’d say pointed to takeover potential.

But this is Kresta, a blind wholesaler and retailer and generally terrible company. It’s burned so many people over the years and I’ve never understood why people are so interested in an unsexy blind company.

Fiesta Design, a company associated with Indonesian businessman Hardjanto Siswandjo, bought the 19.9% stake once owned by Trahar after his attempt to buy Kresta with a low-ball bid failed.

He might make a bid. But then again, offers have been made in the past and nothing has come of them. I wouldn’t go near it. Kresta seems to attract these corporate machinations for reasons I’ve never understood and it’s destroyed a lot more value than it’s made.

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

-Takeover Action January 23-27, 2012
Date	Target	ASX	Bidder	(%)	Notes
19-Jan-12	Accent Resources	ACS	Xingang Resources	20.68
24-Jan-12	African Iron	AKI	Exxaro Australia	21.05	Pre-bid acceptance
10-Jan-12	Anvil Mining	AVM	Minmetals Resources	40.10	Lock up deal on 40.1%. Ext to Feb 16
23-Jan-12	Brockman Resources	BRM	Wah Nam International	57.64
20-Jan-12	Contango Capital Partners	CCQ	Contango Micro Cap	72.82	Ext to Feb 20
16-Dec-11	Gold One International	GDO	BCX Gold Investments	82.80	Unconditional
15-Dec-11	Hastings Diversified	HDF	APA Group	20.71
13-Jan-12	Laguna Resources	LRC	Kingsgate Consolidated	98.14
25-Jan-12	Living and Leisure	LLA	Merlin Entertainments	51.35
18-Jul-11	Mintails	MLI	Seager Rex Harbour	37.33
16-Jan-12	MSF Sugar	MSF	Mitr Phol Sugar	28.64	FIRB approves
24-Jan-11	Razor Risk Technologies	RZR	TMX Australia	78.23
23-Jan-12	Signature Metals	SBL	LionGold	26.01
12-May-11	Sphere Minerals	SPH	Xstrata	75.29	Unconditional
Schemes of Arrangement
12-Dec-11	Aston Resources	AZT	Whitehaven Coal	19.99	Vote late Mar
08-Dec-11	Austar United Communications	AUN	Foxtel	0.00	Vote Feb 17
29-Aug-11	Auzex Resources	AZZ	Bullabulling Gold	0.00	See GGG Resources - 50/50 merger
20-Jan-12	Charter Hall Office REIT	CQO	Macquarie Capital consortium	0.00	Vote about Mar 15
25-Nov-11	Flinders Mines	FMS	Magnitogorsk Iron and Steel Works	0.00	Vote Mar 1
29-Aug-11	GGG Resources	GGB	Bullabulling Gold	0.00	See Auzex Resources - 50/50 merger
20-Jan-12	oOh!media	OOH	Champ III Funds	19.60	Vote Feb 27
11-Oct-11	Sundance Energy	SDL	Hanlong Mining Investment	17.99
Backdoor Listing
05-Jan-12	Consolidated Steel	CGQ	CFT Holdings (HK)	0.00	Approved
12-Aug-11	Millepede International	MPD	Cool D'Fine	0.00	Marine HVAC provider. Vote mid-Nov
Foreshadowed Offers
27-Sep-11	Bannerman Resources	BMN	Sichuan Hanlong	0.00	Conditional proposal. Talks continue
17-Oct-11	Customers	CUS	Unnamed party	0.00	Non-binding discussions
08-Dec-11	Endocoal	EOC	Unnamed parties	0.00	Unsolicited approaches
19-Jan-12	Extract Resources	EXT	Taurus Minerals	42.74	Conditional on upstream acquisition of Kalahari
05-Oct-11	New Hope Corp	NHC	Unnamed parties	0.00	Proposals invited
06-Jun-11	Pulse Health	PHG	Unnamed party	0.00	Expression of interest
01-Dec-11	Spotless Group	SPT	Pacific Equity Partners	19.64	Revised proposal

Source: News Bites