A suitor for Sigma

PORTFOLIO POINT: The beleaguered pharmaceuticals company attracts a bid, which fails to excite shareholders.

There’s a lot of trepidation in the Australian M&A market and while I can understand where it comes from, I can also see a lot of opportunity. Over the past few months I’ve pointed out how Australian companies have had a rare opportunity to snap up foreign assets thanks to the strength in the Australian dollar. The tables have now turned, thanks to the collapsing interest in our currency, which despite what Kevin Rudd claims has been influenced by his RSPT. Throw in the boom followed by the bust in interest for Macarthur Coal plus a 15% sharemarket correction and you’ve got a nervous M&A market. But takeover activity has shown little sign of abating while the corresponding share prices are providing handy discounts to careful investors.

Sigma Pharmaceuticals (SIP). It appears foreign interest in Australian health stocks is gaining momentum, with this much maligned pharmaceuticals company receiving a $700 million reprieve by South African company Aspen Pharmaceuticals that promises to save it from oblivion. Sigma has been offered 60¢ a share (a 69% premium to its price before the bid) but the shares have only risen to 49¢ since then. The discount indicates the market has doubts about whether Sigma will accept the offer, or that Aspen might pull out. Sigma has provided the market with so many downside surprises in the past that it’s possible the South Africans might find something about Sigma they don’t like, as if there wasn’t enough already.

Aspen obviously wants to expand beyond Africa, and the cheap Australian dollar provides a rare opportunity to snap up some good parts of a business that was worth $1.5 billion only nine months ago. It’s now up to the target board to accept the offer, which it should because there’s a chance that Sigma could fail without it. This one isn’t without its risk but if the market hadn’t tanked like it had and Sigma was in an identical situation, that discount would get a lot more attention among traders.

Healthscope (HSP). Staying with health stocks, hospital operator Healthscope has been quickly served with a sweetened takeover offer of by its private equity suitors, still strongly suspected to be TPG and Carlyle Group. The new bid of $5.75, a 4.5% increase from its original $5.50 offer, values Healthscope at $1.82 billion. I said last week that private equity companies are generally pretty inflexible when it comes to price and that’s generally the case. What you have to remember here is that with a 7.5% contraction in the value of the Australian dollar, from the bidders’ point of view this is arguably a lower offer. But we deal in Australian dollars here and I’ve heard that major shareholders have urged the target to engage its suitor. This morning Healthscope opened its books up to the bidders to conduct due diligence, which is a good sign but still the stock trades at $5.25, a substantial 9.5% discount to the bid price.

Some investors might have been spooked by reports that some directors believe Healthscope is worth as much as $7 a share. I’m not sure this is the case; if there was a serious feeling between board members that the company is worth almost 18% more than the current bidding price it would have been quite easy for them to knock the suitors back, as many boards have done recently.

The thing about Healthscope, and the health sector generally, is that the Rudd government is determined to put pressure on the private sector by stripping out costs. There hasn’t been a great deal of attention paid to how government policy could influence our health companies. In any case, the Healthscope board isn’t reticent, so I think there’s good value to be had here.

DMC Mining (DMM). Last week we heard that the target’s board was talking to Chinese suitor Meijin Energy Group to increase its conditional 50¢ bid after rival bidder Cape Lambert put an unconditional 50¢ on the table. Meijin came through with the goods, replying with a bid of 54¢, which remains conditional. The question is whether Cape Lambert will hit back with another offer. This has come a long way already from the 40¢ starting line back in March, but I’ve heard that DMC could be worth upwards of 60¢. Cape Lambert can bump up its unconditional bid to 53¢ and the Chinese can then easily take advantage of the weaker Australian dollar. Their tendency for conditionality would then force them to go even higher than Cape Lambert. The stock is trading at 54¢, so there’s a slight element of downside with good reason to believe there’s more action to come.

Arrow Energy (AOE). Shell and Petrochina had me worried that they might lower their $3.44 billion takeover of Arrow Energy, but to the market’s relief the company’s filed the scheme booklets with ASIC late last week. The offer of $4.70 a share includes a share in the spinoff of Arrow’s international assets, to be dubbed Dart Energy. This trade has become interesting again because the stock is trading at $4.74, which means the market doesn’t think much of those international assets, but I remember seeing confident valuations that said they’d be worth at least 30¢ a share. Even if they’re worth half that, it’s still a great trade and shows how the market can step over opportunities when confidence goes out the window.

Dexion (DEX). This storage products maker has received a friendly $83.8 million takeover offer from GUD Holdings, which isn’t sitting on its hands after its tilt at Breville was knocked back by the ACCC. The offer of 80¢ is a tremendously pleasing 100% premium to the previous trading price, but again we see investors getting the yips. It’s trading at 68¢, a 22.5% discount to the takeover offer. While investors could be perplexed by the competition regulator’s decision to block GUD on Breville, my understanding is there isn’t much to worry about with this one. Again, there’s a lot of downside if the ACCC steps in but for the more risk-averse investor there’s plenty of upside to keep traders interested.

Foster’s Group (FGL). This half of the Australian beer duopoly is not only looking more attractive with a depreciated currency, but has missed one of its last opportunities to forge its own destiny. Back in February I wrote (see My Foster’s cure) that when the Australian dollar was high that Foster’s should raise capital to pay down its US dollar debt. Well, that moment has passed. Now the beer maker is fighting a basket-case wine business, a weakening beer business and less encouraging currency differentials that make its foreign debt more expensive and Australian business more attractive. Foster’s has been a major takeover target for a long time and the state of the Australian dollar only adds to this.

Nufarm (NUF). The attractiveness of this agribusiness company suffers from the way its board dealt with the last batch of takeover activity. The directors rejected a fully fledged offer at $12 a share from China’s Sinochem, instead opting for a 20% offer at $14 a share from Japan’s Sumitomo. The stock has since hemorrhaged to about $5.90. The problem for Nufarm is that the only company that’s going to bid for it is Sumitomo and here’s why: if someone from the outside wants to bid Sumitomo only has to get into the fray if the suitors match or exceed the $14 they put down on the table. No one is going to bid that much; Sumitomo won’t want to crystallise a loss and it holds a blocking state to ensure that doesn’t happen.

It would make sense for Sumitomo to bid about $10 a share for the rest of Nufarm, but the share price will have a rally quite a bit before it’s in that league. I’ve also found that Japanese companies tend not to opt for hostile takeovers; they prefer to buy up stakes in companies and then just sit on them. There’s little doubt that this deal has proved to be disastrous for them so far. Either way I think Nufarm is stuck for the moment with a register filled with annoyed shareholders.

Macarthur Coal (MCC). Peabody’s offer of $15 a share will now look a little cheaper on its US dollar books, so will they come back and rescue Macarthur? I think Macarthur will remain in M&A purgatory until Canberra figures out how it’s going to tax Australia’s mining companies. It’s true that the favourable currency differentials have made a bid for Macarthur easier for foreign bidders, but Peabody has to be certain that the benefits of that wouldn’t be offset by the massive chunk of Macarthur’s earnings the government is aiming to snatch. Both Peabody and Macarthur will want to wait until the government gets its house in order and that means it’ll be left largely untouched.

Ammtec (AEC). Campbell Brothers had put a cash-scrip offer on the table that values this minerals tester at $123 million. Shareholders have the option of taking $3.35 cash, or two Campbell Brothers shares for every 17 Ammtec shares they own. The cash offer represents a premium of 33% and the share price is trading at $3.20, a 4.5% discount to the cash offer. Finally, the market is showing a bit more ticker, probably because this is Campbell Brothers’ third tilt at Ammtec and investors appreciate their stubbornness.

If you’re going to play any of these companies I’ve mentioned, this is probably the one I’d steer clear of the most. The premium is modest by comparison and what makes this one difficult is Campbell Brothers has put several revenue and EBIT conditions on the offer. The conditions only apply to the year ending this June and Ammtec has expressed tremendous confidence about the 2011 financial year, but they’ve been strangely quiet on the topic of this year. With the period in question ending in just over a month, the company would know what its chances are and the fact that they haven’t said anything only has downside from where I sit. There’s also the chance that Campbell Brothers just waive the condition, but I think there’s better potential elsewhere in the market right this minute.

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

nTakeover action, May 17-21, 2010
Date	Target	ASX	Bidder	(%)	Notes
18/05/10	Adelphi Energy	ADI	AWE	33.80
08/03/10	Arrow Energy	AOE	Royal Dutch Shell and PetroChina	0.00
11/05/10	CBH Resources	CBH	Toho Zinc	25.92	Recommended offer for 49.9%
03/05/10	Coote Industrial	CXG	Elph	26.00	35% offer unconditional
13/05/10	Corporate Express Aust	CXP	Staples	66.71
21/05/10	Dexion	DEX	GUD	0.00
10/05/10	DMC Mining	DMM	Cape Lambert Resources	36.20	Matches Meijin offer.
21/05/10	DMC Mining	DMM	Meijin Energy Group	0.00	Offer revised.
18/05/10	D2 Marketing	DTO	Co-Investor Capital Partners	94.20
19/05/10	Gloucester Coal	GCL	Macarthur Coal	0.00	Offer withdrawn.
06/04/10	Gloucester Coal	GCL	Noble Group	87.70	Fall back offer in case Macarthur bid blocked.
16/04/10	Indophil Resources	IRN	Zijin Mining Group Company	41.06	Directors accept.
21/05/10	Mesa Minerals	MAS	Mineral Resources	30.20
01/04/10	Orion Petroleum	OIP	Octanex	7.08	Rejected.
13/05/10	Rey Resources	REY	Gujarat NRE Minerals	12.00	Extended to June 11.
20/05/10	Tandou	TAN	Guinness Peat	22.25	Rejects new offer.
26/02/10	Warrnambool Cheese and Butter Factory	WCB	Murray Goulburn Co-Operative	5.00	Rejects revised offer.
Scheme of Arrangement
10/03/10	Aurox Resources	AXO	Atlas Iron	0.00	Vote May
16/04/10	Aust Renewable Fuels	ARW	Wasabi Energy	0.00	Vote June
14/12/09	AXA Asia Pacific Hdgs	AXA	AMP and AXA SA	53.93	Revised scheme rejected.
30/03/10	AXA Asia Pacific Hdgs	AXA	National Australia Bank	0.00	Recommended. Terms agreed.
12/05/10	Jetset Travelworld	JET	Stella Travel Services Holdings	0.00	Stella to hold 50%. Vote August
04/05/10	Lihir Gold	LGL	Newcrest Mining	0.00	Vote July
15/04/10	Macarthur Coal	MCC	New Hope Corporation	0.00	Rejects upped offer.
18/05/10	Macarthur Coal	MCC	Peabody Energy	0.00	Unable to recommend further offer
03/05/10	MacarthurCook Ind Prop	MIF	HRPT Properties	24.42	Vote July
16/04/10	PacMag Metals	PMH	Entrée Gold	0.00	Vote June
03/02/10	Rusina Mining	RML	European Nickel	0.00	Vote May
12/05/10	Transurban	TCL	Canada Pension Plan Investment Board, CP2, Ontario Teachers Pension Plan Board	0.00	Revised proposal rejected.
29/04/10	Westpac Office Trust	WOT	Mirvac Group	0.00
Foreshadowed Offers
12/04/10	CBH Resources	CBH	Nyrstar	0.00	New proposal.
03/05/10	Centrebet	CIL	Unnamed party	0.00	Discussions continue.
20/05/10	Healthscope	HSP	Private equity consortium	0.00	Revised scheme proposal received.
21/05/10	Sigma Pharmaceuticals	SIP	Aspen Pharmacare	0.00
19/05/10	Sino Strategic	SSI	CY Foundation Group	0.00	Offer unlikely to proceed

Source: News Bites