Accounting deal a balancing act

The planned merger of accounting firms WHK and SFG stacks up … but the numbers aren’t big.

Summary: A merger between WHK Group and SFG Australia has been on the cards, but the all-scrip deal won’t deliver a huge return for shareholders in the short term.

Key take-out: SFG shareholders won’t gain much in the short term, while WHK investors will get a small lift.

Key beneficiaries: General investors. Category: Portfolio management.

WHK Group (WHG), SFG Australia (SFW)

The proposed ‘merger of equals’ between WHK Group and SFG Australia has been on the cards for some time. In my view, it’s a good deal, but I think the smart move would be to hold on to any shares and wait to see if it gets approved by the board. If it gets the approval needed, I would think WHK shares would be the better of the two to buy.

After months of discussions, SFG has finally tabled a formal proposal to merge the two groups. The proposed merger centres on an all-scrip deal of 0.503 WHK shares for each SFG share. Right now, SFG is trading at about 60 cents a share. Under the terms of the proposal, that’s worth about $1.19 per WHK share. Meanwhile, WHK’s current share price is about $1.08, so it’s roughly a 10% premium on that.

The only potential problem is that the WHK board has said it wants to evaluate the proposal and then decide how to proceed. This creates a measure of uncertainty, as does the fact that it needs shareholder approval, but in my view a deal will be done here. It makes sense for both groups and would deliver a lot of cost savings. The way the Government is going with MySuper and various other changes, I suspect that fees in the industry are likely to come down further, making the advantages of scale even more important.

Investors should keep in mind that for SFG shareholders, however, there doesn’t seem to be much to be gained in the short term. If the merger is approved, the only difference will be they will own 58% of a much bigger company and WHK shareholders will own 42% of the company.

For those who don’t want to wait, they could buy WHG shares and might make a 10% return, but because it is scrip, any change in the SFG share price will have an effect. If the deal is recommended by the WHK board, I think it is a buy and of the two shares, I would buy WHK, because it is the cheaper of the two, given the deal terms.

Ten Network (TEN)

Ten Network’s share price has risen in the past few days on speculation that News Corp, which owns Eureka Report, might make a move on Ten Network Holdings. This came after James Warburton was last week ousted from the position of chief executive in favour of Hamish McLennan, who is known to be a close advisor to Rupert Murdoch. I would stay away from this one, given Ten’s struggle to compete with the other networks.

I wouldn’t have predicted News Corp would make a bid for Ten, but then again, I think he will do whatever it takes to cement his family’s control of the company and if it means converting Lachlan’s Ten into more family shares in News Corp, it is entirely possible. Whether or not News Corp would be successful in a bid is another story. It could find it difficult to get approval from the Australian Competition and Consumer Commission (ACCC) since it owns a 50% stake in pay-TV company Foxtel.

I think, in the short term at least, investors should only consider buying into the company based on some sort of earnings or ratings recovery and right now there’s no evidence of that. In television, it takes six months to a year of ratings improvement before the advertising dollars follow and Ten is getting absolutely slaughtered right now.

Discovery Metals (DML)

Following the news that Chinese private equity firm Cathay Fortune abandoned its takeover bid for Discovery Metals a few weeks ago, there has been speculation that Discovery is considering a capital raising. The copper explorer and producer has neither confirmed nor denied these rumours. At around the 64 cent mark, I reckon the price might have bottomed out at this stage.

I think for the traders and investors bidding on a recovery, it’s not a bad one to buy into at the moment. And despite the recent sell off, the share price should recover. The bidder is still holding onto its stake, which is a good sign, and nothing has fundamentally changed with the company. The stock is trading at not much more than a third of what Cathay was prepared to pay, so I would think that Cathay might actually come back at some stage.

RHG Mortgage Corporation Ltd (RHG)

RHG Mortgage Corporation Ltd, formerly RAMS Home Loans, looks to still be in talks with another party, possibly RESIMAC, regarding the possible sale of its $2.5 billion mortgage book. There has been no word yet on how the talks are going, but at 50 cents, I think it’s one is a very solid buy.

The share price has barely risen in the past two weeks, despite the news of a possible takeover. By my understanding, RHG is keen to liquidate the mortgage book and move on and I reckon if it gets a reasonable offer, investors could easily get 60-65 cents a share. On the other hand, if the approach comes to nothing, there won’t be much downside. The mortgages will continue to be run-off and RHG will just keep paying off cash. For me, 50 cents is a good price to buy in at without paying a premium.

Mortgages are now quite highly sought after, especially older ones because they are often at higher interest rates. As well, the housing market is picking up again, banks are looking to buy volume again in the market, and here is a book of home loans that can be bought. I really think this is a reasonably attractive asset.

Sundance (SDL)

There has been talk in the last few days that if Hanlong Mining makes the first of three $5 million payments tied to a convertible note facility that is due by the end of this week, investors will be less nervous about the never-ending takeover bid for Sundance Resources. I really don’t think this makes much of a difference and would still stay away from this one until Hanlong signs up a joint venture partner.


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

Takeover Action February 21-27, 2013

DateTargetASXBidder(%)Notes
13/02/2013Central Australian PhosphateCENRum Jungle Resources0.00
23/10/2012Clearview WealthCVWCrescent Capital Management62.70
6/02/2013EngencoEGNElphinstone Group45.60
18/12/2012Firestone EnergyFSERange River Gold0.00
20/02/2013Gujarat NRE Coking CoalGNMJindal Steel & Power26.75
22/02/2013LinQ Resources FundLRFIMC Resources93.44FIRB approves. Ext to Mar 15
30/01/2013Neptune MarineNMSMTQ Corp83.36Unconditional
18/02/2013United OrogenUOGIron Mountain Mining22.93Unconditional
19/02/2013Wilson HTMWIGMariner Corporation0.00Offer extension fails
Schemes of Arrangement
24/12/2012Avocet ResourcesAYELion One Metals0.00
1/02/2013EndocoalEOCChina Yima Coal/Daton Group0.00Vote Feb 28. FIRB approves
26/02/2013SkywestSXRVirgin Australia0.00SCI, Singapore, approves. ACCC clears offer. Vote Mar 13
30/01/2013Sundance ResourcesSDLHanlong Mining Investment17.99Meeting adjourned. Date TBA
25/02/2013Texon PetroleumTXNSundance Energy Australia0.00Approved
Foreshadowed Offers
1/02/2013BerkleeBERBrett Jones - managing director0.00Offer to takeover certain assets
14/01/2013Billabong InternationalBBGAltamount/VF Consortium0.00Due diligence
19/12/2012Billabong InternationalBBGExec Paul Naude Consortium0.00Due diligence
4/12/2012GraincorpGNCArcher Daniels Midland19.90Revised indicative offer
11/02/2013Westside CorpWCLUnnamed party0.00Discussions continue
25/02/2013WHK GroupWHGSFG Australia0.00Non-binding indicative proposal
Source: NewsBites

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