All eyes on Santos

PORTFOLIO POINT: Will there be a Chinese bid for Santos? A newspaper report may turn out to be mere speculation.
Santos. Santos shares climbed today on a report in the South China Morning Post newspaper in Hong Kong that China National Petroleum Corp (CNPC) will team up with a foreign oil company such as Chevron, Total, Eni or BP to bid for the South Australian oil and gas producer.

The market has been waiting for Santos to come into play since the 15% individual shareholder cap was removed by the South Australian government at the end of last month. It’s certainly a stock that can now be bid for, and if you want into gas it’s the last big one left.

But you’ve still got the issue of the potential bill for the Indonesian mud disaster and no one knows how much that will cost; it’s really an issue for the Indonesian government.

My reading of this is that it’s quite possible CNPC could do it, but the fact the paper is saying it might team up with a variety of companies suggests it is just a rumour.

Earlier reports were that the Santos stock was soaring on the news but at the end of the day the stock gained 9%, which is not dramatic when set against the wider market that gained 4% over the session.

Santos certainly is an attractive target, but whether it’s this particular deal we don’t know. And if it were an offer from a Chinese and European group, the foreign investment review board (FIRB) would certainly have a look.

Coca-Cola Amatil/Lion Nathan. What’s happening with Lion Nathan’s bid for Coca-Cola Amatil is interesting. Coca-Cola Amatil has rejected the Lion bid as being inadequate, but it’s all really subject to a decision by The Coca-Cola Company of the US, which holds 30%.

I think it’s time for the Coca-Cola Amatil board to start thinking about the remaining 70% of shareholders. The Coca-Cola Company owns 30% of Coca-Cola Amatil, but if Coca-Cola Amatil board is not prepared to make a recommendation without hearing from the 30% shareholder, what it’s really saying is that that board has no role.

I think the Coca-Cola Amatil board needs to get on the front foot and say, 'Look, we think this deal makes sense, and we’ll be urging our 30% shareholder to accept it.’

As it is, the Lion Nathan offer is trading at a near 15% discount to the deal terms because people are rightly concerned about what the Coca-Cola Amatil board will do.

Foster’s. There are rumours that the Foster’s board is going to recommend leaving things as is when it comes to their strategic review in January or February 2009. I still think demerging the wine and beer businesses makes sense, because the beer business would be a very attractive takeover target. As I understand it, the problem is that, of course, a demerger would trigger a review of all the company’s debt facilities and, right now, as we’ve seen with OZ Minerals and Rio and any other company that’s got a fair bit of debt, you don’t want to be going back to your bank and saying, 'Look, we’ve triggered this review, but could we just have everything the way it is?’

So it may well be for that reason that Foster’s does nothing, but if that is the case, that’s another year of dithering over a failed strategy from several years ago of buying Southcorp and getting into wine. We’ll see what happens, but if it does nothing it won’t be good for the share price, because Foster’s shares, at around $5.50, have anywhere between 50¢ and a $1 of a takeover premium built in. Investors will remember that in November it was revealed that Deutsche Bank had bought a 5% stake in Foster’s on behalf of North American brewer Molson Coors. If the demerger doesn’t go ahead and people therefore think that no one wants to bid for the company, the stock could slip back. The board needs to be aware of this.

Fairfax Media. Finally, Fairfax needs to reduce debt. It’s also got a new chief executive, Brian McCarthy, the former deputy who has been acting CEO since David Kirk resigned last week, and is expected to be confirmed at a board meeting this week. Hands up – I work for Fairfax via radio station 3AW.

So one asset Fairfax acquired through its Southern Cross Broadcasting purchase was television production company Southern Star. It’s clearly not a core asset. It’s looking to sell Southern Star and the rumour is that Lachlan Murdoch might be looking at it. But I get the impression Lachlan Murdoch is basically looking for something to do. He’s got this private investment company, Illyria, and that was going to buy Consolidated Media, which would have been a disaster because Consolidated Media has just written down its stake in PBL to essentially zero. He must feel like he got out of jail there by not buying that, and now he wants to buy a television production company.

When you look at the way TV networks commission a show for a season and then axe it if it doesn’t rate, I think free-to-air TV production is a very difficult business. People are attracted to it because they think it’s glamorous and sexy, but I don’t think it makes that much money, unless you happen to get a real hit and something that sells internationally and you can count on one hand the number of Australian TV shows that have done that. (To read more on television investments see Tim Treadgold’s feature The multimedia Kerry Stokes).

MYOB. MYOB has a bid on the table from the Archer Capital-led consortium, at $1.02, rising to $1.12 if it gets to 90% acceptances. Archer has come out and said to the MYOB board, 'If by 5pm on Tuesday (December 9) you don’t recommend our offer, we’ll let it lapse on December 18, or if by 5pm Wednesday (December 10) we haven’t got 50%, we’ll let it lapse.’

So there’s a clear choice here: either the board recommends or shareholders choose to accept. I’m pretty certain that MYOB chief executive Craig Winkler won’t accept; he’s got about a quarter of the company, so that leaves the rest of the company with a very clear decision.

The MYOB board has kept saying they’re in discussions with other people, but thus far, nothing has come up. I don’t think a private equity firm is going to bid more for it. I understand Sage, which is the UK software firm, has walked away. Sage would have had competition issues anyway.

So it’s an interesting choice for shareholders: if the bid goes away, MYOB shares will almost certainly fall. Shareholders should be ringing the board and saying, 'This is what we want you to do: recommend the bid because there won’t be a higher one.’

Felix Resources. There are a few interesting bids in the energy sector, even though the oil price is down at $US41 a barrel.

Felix Resources has been in play for about the past six months, and its share price has ranged from above $23 to as little as $5. Chinese company Yanzhou Coal Mining has said that it’s interested, and in fact its shares on the Hong Kong exchange went into a trading halt on Friday. Apparently it’s doing due diligence.

If there is a deal here, it’s very hard to pick the price, because Felix’s share price has fluctuated so much in the past couple of months. We should know within a week what’s happening, though, because Yanzhou has been looking at this for some time.

Incremental Petroleum. Incremental Petroleum is another interesting deal in the energy sector. It had a scrip offer from Cooper Energy, which attracted 27% acceptances. It now has an offer from TransAtlantic, which is a small-cap Canadian company. The problem is that that bid is conditional upon getting 75%, and given that Cooper has 27%, that’s not going to work.

I have a feeling that the TransAtlantic bid is not a real bid any more. The fact that it had such an obvious defeating condition means that it’s not going ahead. So if you’re an Incremental shareholder it’s hard to know what to do, but I wouldn’t be buying the stock based on that bid succeeding, because with the condition in place it can’t succeed.

Fusion Energy/Paladin Energy. Paladin Energy has made a conditional bid for the dual-listed Fusion Resources. It’s got some market and uranium price conditions attached. From what I’ve been told, this bid will probably go ahead, but Fusion is a very small cap company (valued at $16.6 million on Monday, December 8).

It’s interesting when you think back a couple of years to the sheer number of uranium stocks that were floated out there. The uranium price has gone all the way up, just like oil, and all the way back again. There will either be consolidation or a lot of them are going to go broke. So if I were a Fusion shareholder I’d probably be grabbing on to this.

Espreon. Private investment group Vectis has returned with a bid for financial, legal and property transaction specialist Espreon. It had bid 62¢ a little while ago, but let it drop because the overall market fell so much. The new bid, perhaps unsurprisingly, is a third lower than the previous bid; it’s now 40–42¢ depending on whether they get 90% acceptances. The shares don’t trade very much. The Espreon board has rejected the bid as inadequate, which means the suitor could walk away which is generally not good for the share price.

Qantas/British Airways. There’s no real new news on Qantas and BA, except that if you were buying Qantas shares thinking that there’s some automatic uplift, there probably isn’t. If Qantas and BA merge – and I think the probability of this is over 50% but certainly not 100% – there are many political considerations.

Airlines are like newspapers and breweries in that they seem to have this special significance that tug at the heart strings. The fact is there are too many airlines in the world and too many European countries keep trying to prop up airlines, and as a result there’s over-capacity. Qantas’s major profitable routes are to the west coast of the US and to London. If it merges with BA, effectively what you’ll do is fly a Qantas flight to Singapore, and then get on a BA flight to London.

And what that will enable you to do is go to more places in Europe: you could fly direct to France, Germany or Italy on BA flights, whereas Qantas couldn’t do that. As it is, that’s effectively what happens: a lot of the crews on the Singapore/London leg are actually British Airways crews anyway. So that will make that leg more profitable for both Qantas and BA. Qantas will still probably keep its west coast US routes and obviously its domination of the Australian domestic business.

But political considerations could scupper this deal. And in any case, I don’t think it’ll deliver a takeover premium for Qantas. I think it’s more like a merger of equals. So, for Australian-based shareholders, I don’t think there’s a great deal in it, except in the longer-term if the deal goes ahead and it makes Qantas’ profits go up.

AWB/ABB. No news on talks between AWB/ABB Grain. There will be more mergers in the rural space. I think GrainCorp is one to look at. Futuris is looking to sell off bits of its business, like AACo, which it’s tried to sell. Futuris is going to rename itself Elders, and go back to being a rural focus concern. So there’s a lot happening there as you’d expect, given the outlook for farming which is generally still quite good.

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

nTakeover Action December 1-5, 2008
Date	Target	Code	Bidder	(%)		Notes
05/12/08	Aequs Capital	AQE	Findlay Securities	23.94
18/11/08	Amazing Loans	AZD	IEG Holdings	27.32		Letter of intent received.
01/12/08	Babcock & Brown Communities	BBC	Prime Retirement & Aged Care Property Trust	1.50		Offer closed.
19/11/08	BigAir Group	BGL	Clever Communications	13.58		Ext to Dec 24.
28/11/08	Broadcast Production Services	BKR	Prime Media Group	77.11		Offer for the balance. Ext to Jan 7.
28/11/08	Espreon	EON	Vectis	19.73		New offer, after terminated scheme.
02/12/08	Fusion Resources	FNS	Paladin Energy	0.00
01/12/08	GoldLink IncomePlus	GLI	Emerald Capital	28.16		Seeks 45%. Ext to Dec 10.
05/12/08	Huntley Investment	HIC	Brickworks Investment	93.65
26/11/08	Incremental Petroleum	IPM	TransAtlantic Petroleum	13.32
04/12/08	Ingena Corp	IGG	UXC	79.50
22/09/08	Murchison Metals	MMX	Sinosteel	0.00		Cleared by FIRB to move to 49.9%
07/11/08	MYOB	MYO	Archer Capital, HarbourVest Partners	0.00		See Foreshadowed Offers.
28/10/08	Pelorus Property	PPI	Pelorus unlisted funds	0.00		Merger with unlisted funds closes Dec 22.
02/10/08	Perilya	PEM	CBH Resources	0.00		Renewed offer. See also Foreshadowed Offers.
04/12/08	Queensland Gas	QGC	BG Group	96.44		Compulsory acquisition.
02/12/08	Waratah Coal	WCC	Mineralogy (Clive Palmer)	19.40		Extended to Dec 15.
nScheme of Arrangement
24/07/08	Australasian Resources	ARH	Resource Development International	66.37		Resource Devel associated with Clive Palmer who holds 66.37%.
24/11/08	Australian Wealth Management	AUW	IOOF Holdings	0.00		Vote March.
22/10/08	Aviva Corp	AVA	NEMI Northern Energy & Mining	0.00		50-50 eventual shareholding split. No vote set.
04/11/08	Island Sky Australia	ISK	Salton Inc	0.00		No vote date set.
05/12/08	People Telecom	PEO	M2 Telecommunications Group	0.00		No vote date set.
28/11/08	Scarborough Equities	SCB	Bentley International	0.00		No vote date set.
nBackdoor Listing
20/11/08	BMA Gold	BMO	Aflease Gold shareholders	95.60		Aflease shareholders to control "Gold One".
26/11/08	Grange Resources	GRR	Australian Bulk Minerals shareholders	73.90		Acquisition approved.
06/11/08	Jupiter Mines	JMS	Pallinghurst Res & Red Rock Res	0.00		Agreement signed, subject to EGM.
07/11/08	Metminco	MNC	Hampton Mining	0.00		To acquire 51% of unlisted Hampton. Change of control.
nForeshadowed Offers
28/11/08	ABB Grain	ABB	AWB	0.00		Discussing scheme merger.
03/11/08	APN News & Media	APN	Several unnamed parties	39.00		Independent News & Media has approaches on its 39% holding.
23/10/08	Babcock & Brown	BNB	Unnamed parties	0.00		Expressions of interest.
28/10/08	Becton Property	BEC	Several unnamed parties	0.00		Due diligence starts.
22/10/08	Bravura Solutions	BVA	Ironbridge Capital	0.00		Discussions terminated. Possible alternative proposal.
05/12/08	Felix Resources	FLX	Several expressions of interest	0.00		Confirms ongoing interest.
16/10/08	Jackgreen	JGL	Unnamed parties	0.00		Received approaches.
07/11/08	MDS Financial	MWS	Unnamed parties	0.00		Rejects offer for Market Data. Other discussions continue.
07/11/08	MYOB	MYO	Unnamed parties	0.00		Possible alternatives to Archer proposal.
28/11/08	OM Holdings	OMH	Consolidated Minerals	11.00		Seeks ConsMin intentions.
05/12/08	Perilya	PEM	Unnamed parties	0.00		Alternative proposals.
03/12/08	Qantas	QAN	British Airways	0.00		Discussing "merger of equals".
14/11/08	Redflex Holdings	RDF	Unnamed parties	0.00		Unsolicited indicative proposals.
16/06/08	Staging Connections	STG	Several parties	0.00		Non-binding proposals. Due diligence proceeding.
07/11/08	Warehouse Group	WHS	Woolworths	0.00		Media reports that Woolworths still interested in offer.

Source: NewsBites