A fund deal that stacks up any way

PORTFOLIO POINT: A return of over 9% under the worst-case scenario makes the takeover of Australian Infrastructure Fund an attractive proposition.

Australian Infrastructure Fund (AIX)

Regular readers may already be familiar with the complicated takeover of sorts in which AIX is selling all of its assets to the Future Fund, with proceeds and excess cash and franking credits to then be distributed to security holders (for more information, see here). This morning, the terms of the implementation agreement (essentially how the actual payments will occur and their likely amounts) were released and it’s a very attractive picture for investors.

Unfortunately, the AIX share price has risen roughly 2.5% today to $3.13, but even after this increase the rates of return available look good. I’ve created this table to summarise what is quite a complex agreement in the best-case, and worst-case, scenarios.

To date it’s been a bit hazy as to exactly how much money you would get, because it wasn’t a takeover at a specific price, but this table is based on their figures and their timing. So, best case – and this assumes you can buy the stock at today’s closing price of $3.14, and I’ve included 30bps of brokerage – you’ll get 5.5c at the end of February, plus a bit of franking, then between $2.95 and $2.98 in “late April”, and another 24-25c somewhere between June 30 and December 31, plus some potential further franking credits.

These are internal rates of return, so this is the annualised rate of return of all these cash flows. The best-case timing (November to June) is less than a year, but the return you get, that’s the equivalent annualised return. This is the technique for comparison, because these are two investments with different cash flows and different timings. The worst case is a bit over 7%, best case is more than 12%, and this assumes that no other bidder comes into it – there are rumours that other people are having a look.

I’d say this is excellent. Your base-case worst scenario is making an annualised rate of 7%. The Future Fund and Hastings, a division of Westpac, are the ones standing behind this so, really, there’s not much risk they’re going to walk away from it. When you look at term deposits, or almost anything else, the rates are terrible. The market has pushed up the AIX price a bit, but if it drifts back at all I would be inclined to get some.

Arrium (ARI)

The stock in the miner and steelmaker has been stuck at around 71-73c (it closed today at 73c) since the Posco-led consortium of bidders said it was walking away after a revised 88c bid was rejected. I do not believe they’ve walked away at all.

Media reports over the weekend added weight to a rumour that the bidders were approaching governments for indicative support, with the aim of placing pressure on the Arrium board. The chief executive of Posco Australia (the South Korean steel giant’s local division) was reported as saying he was confident the South Australian and federal governments were in favour of a takeover, and I don’t think there’s been anything lost in translation here – I think they’re definitely coming back for another tilt.

Why would he be here saying the company wants to buy Australian assets and touting government support following meetings with state and federal government ministers, if there wasn’t another bid on the cards?

Perhaps Posco is trying to force Arrium’s hand a bit by walking away, letting the share price drift back down to where an 88c offer looks quite good, and Arrium does carry quite a bit of debt. If a takeover injected money and better future prospects into the company, it could guarantee a lot of jobs, which is one of the main reasons the South Australian government would be all for it. Remember Posco has said it wants to revitalise the steelmaking business, not scrap it.

From an investor’s perspective, I think it all suggests Posco is definitely still there for Arrium, and with the iron ore priced firming up the valuation perspective for the company looks better as well – you’d expect at least 88c and possibly north of a dollar, after discussion with the board about an acceptable price. I think the prospects of a takeover here are quite good – Arrium’s back on the agenda again.

GrainCorp (GNC)

GrainCorp closed today at $12.23, and tomorrow it goes ex-dividend with 35c a share, fully franked, so there will be a price drop. The chance to get that dividend will be gone by the time investors read this tonight, but I’d like to reiterate that Graincorp remains a good buy.

As I’ve written before, I think the bidder, Archer Daniels Midland, will probably allow people to keep this dividend, and to keep the whole $11.75 a share bid for it, and I think there are still more franking credits it can distribute within the $11.75.

So I would maintain that the stock is still definitely a buy, but tomorrow you would look to buy it at around about $11.88, and it may drop even lower depending on how the market values the franking credits.

Sundance (SDL)

This is a deal that has come a long way and, while I’m hesitant to call it an absolute ‘buy’ because of the problems here all year, it’s really started to firm up.

The bid from Sichuan Hanlong at 45c a share is now just a couple of weeks away from the Scheme Meeting on December 14, and after that it’s all done and dusted. The share price has improved significantly, and is up about 10% over the past month to close at 38c today, as the market comes to realise this takeover is really going ahead.

So the vote is near, but with the stock trading in the high 30s, there’s 6c or 7c still to be made and that is a very good return – 15% at least. The iron ore price has improved since the bid price was cut, and is firming up close to $120 a tonne, and that makes it much more likely the bid will go ahead. Shareholders will vote it through when the meeting comes around in two and a half weeks, there’s no doubt about that, so the whole deal looks pretty good now. It has taken a lot of twists and turns, and I’m hesitant to recommend a deal that has been so shaky for so long, but from this point on it’s looking good.

Qantas Airways (QAN)

By now you’ve likely read all the news that a cabal of investors and bankers – John Singleton, Mark Carnegie, Geoff Dixon and others, some from the takeover attempt back in 2006 and some new ones – are apparently poking around Qantas.

This is not a bid, but it is potentially a purchase of stock, and some say they’ve already bought over 1%. This is a group of investors who reckon that there are more things Qantas should be doing, and interestingly, the sort of things they’re saying Qantas should do are quite similar to what people think Fairfax (FXJ) should do: demerge assets and sell things off.

No one knows what they want to do, but what’s leaked out are suggestions to float or sell off the Frequent Flyer business, which Air Canada did successfully about a decade ago, and float Jetstar as a separate business. They apparently think it would add a lot of value to the company, and I don’t doubt it would. But they don’t want to make a bid for the company this time around, so it’s not Airline Partners Australia all over again, but they could build up a decent sized stake, say 10%, to apply pressure to the board and CEO. I doubt this group could get the backing or the government support for a takeover.

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