PORTFOLIO POINT: Arrium shareholders have enjoyed a good rise since last week, and new investors who bought in have also done well. A higher bid seems likely.
Last week I wrote that there was good buying into the low 70s for this 75c-a-share takeover bid, and people had a day or two to buy it at that price (Bidders won’t get Arrium for a steal). Since then, Arrium has jumped more than I would have predicted, and while I still think there’s a chance of an increase investors should wait for now and try and get it on a bad day. However, the best buy-in price now is likely to be in the high 70s.
On the first day this bid traded as low as 64.5c, and I bought at 68c. Even though the bidders were credible, the board was going to reject it, and there was a good chance of a higher bid. The price today closed at 81c, and reached a peak of 82.5c. The market has gone from doubting the bid would even proceed on the first day to now assuming it will definitely be over-bid.
What seems to have happened here, with the benefit of hindsight, is that Arrium shares traded weakly initially because some were taking advantage of the increased liquidity to sell out. Companies like this, with profit downgrades and shares recently hitting record lows, often have funds sitting around looking at their holdings wishing they had sold. Then suddenly there’s a liquidity event, in this case a takeover bid, and all these funds wishing they’d sold out months or years ago tip shares into the market. Then the real buying pressure from the interested hedge funds kicked in after a day or two.
It’s been a great result for those who bought in last week, but at roughly 8% above the bid the question is whether to buy it now. It’s a tough call, and I do still think the bidders will increase in this case, but I don’t like to pay that much over. How much the business is worth is quite dependent on the iron ore price, but I see this deal getting done between 75c and $1 a share (Alan Kohler, in his Weekend Briefing last week, said that the board would be looking for at least $1.50). It’s a difficult one to value, because if you think that the iron ore business is of interest then the iron ore price is crucial; $130 per tonne creates a very different set of values than $100 a tonne, or indeed $90 a tonne. POSCO would know a lot about iron ore pricing, and it’s obviously decided that now is not a bad time to buy. Some people ascribe a very high value to the ‘mining consumables’ business – these big steel balls that are used to crush up rocks for mine sites. It’s a relatively new business, but an even harder one to value.
Whatever the price, clearly the bidders have plenty of capacity to pay. They’re not a small outfit –they’ve got three big investment corporations on board, the $30 billion POSCO and then there’s Noble Group, so there’s plenty of money there. It’s still an attractive situation – but not as attractive as it was a week ago.
There’s a debate going on about market disclosure – when people should say things and when they shouldn’t. In late June David Jones gets a strange fax message with a purported takeover and it decides to release it. Now Elders has decided to belatedly admit it received a takeover approach from Ruralco (RHL) over a month ago.
It would clearly make sense for Ruralco and Elders to merge their rural services businesses. They are the second and third ranked players in the market behind Landmark and the Elders board should really be engaging with Ruralco, in my opinion. However, I have a problem with buying in here because firstly it’s not really a bid, just a proposal, and secondly I wouldn’t be happy to own Elders in absence of a bid.
I would be inclined to stay away, unless Ruralco shows that it’s genuinely serious.
Discovery Metals (DML)
A group called Cathay Fortune Corporation, which I understand is a Chinese private equity group, has made a $1.70 cash bid for Discovery Metals, a copper miner and explorer operating in Botswana. Even though it’s trading below the bid price, it may pay to wait and see on this deal.
I hadn’t really heard much about the bidder before, but the proposal says they already have National Development and Reform Commission (NDRC) approval and finance in place, so at least it got approvals in advance. Cathay’s obviously serious.
However, the bid is subject to more due diligence and a few smaller, fairly standard conditions, and since we don’t know much if anything about the bidder I would be inclined to just wait for some of those conditions.
I think Discovery will reject the $1.70 bid and say that the company is worth a lot more, and the market closed today at $1.655. I think that’s pretty close to the right place, and what the market’s saying is it thinks the bid will go ahead, but with no counterbid or rise. That means this is a reasonable one to play for a 3-4% gain, but not a great situation. In contrast to Arrium where you had a 10% discount with well-known, cashed-up bidders, you can see what the difference is.
Acer Energy (ACN)
There’s a rare on-market bid from Drillsearch (DLS) for Cooper basin oil and gas producer and explorer Acer Energy. Readers may remember Aurora’s on-market bid for Eureka Energy earlier this year, and that this means Drillsearch will sit in the market for a month and buy all shares sold at the 25.5c bid price.
At the moment Acer is trading at 27c, so Drillsearch isn’t getting any stock, but they have bought 19.9% from the largest shareholder, Republic Investment Management. Drillsearch also said Republic would sell its remaining 18.8% stake into the deal in absence of a superior offer.
I’d say this isn’t a bad buy at 26c. At that price you’ve got 0.5c of downside, which is not much, and the probability that if nothing happens then towards the end of the bid you just sell at 25.5 cents – losing 2%. But there’s also the possibility Drillsearch will increase its bid if it doesn’t get any takers, and you never know, someone else might come along. That’s unlikely, but the board of Acer is assessing the bid and I think they’ll probably reject it, although we don’t know that yet.
In any case, if you’ve got the risk tolerance for it I think this is a case where investors can afford to pay a little above the bid.
QR National (QRN)
A quick point on the Queensland government selling out part of its remaining QR National stake – I had always wondered whether it might be sold to someone who would then bid for the whole company, but that’s not going to happen now.
The government’s selling via a buyback and a few select investors, so there’s nothing going to retail shareholders. The stock is up more than 5.2% on the announcement, so it’s a mild positive for QRN, but it may or may not lead to a takeover. Probably not.
I said last week that remaining shareholder hopes rested on the TPG bid (LINK). Then there was rumour that TPG might pull out, and sure enough the stock went straight back down, and is currently sitting at $1.01.
That tells you this is where Billabong will be if this bid doesn’t go ahead. We don’t know anything for sure, and the company says it’s still engaged, but the rumours are TPG’s not really doing due diligence anymore in which case it might have found some stuff it didn’t like.
When this situation had two potential bidders it looked good. It doesn’t look so good now, but for the brave hearted it’s worth a buy on the view the bid will go through, and the downside’s been largely priced in. It is definitely a play for the adventurous, but Billabong’s been punished by the market for the bid falling over when the bid hasn’t yet fallen over.
It looks like Macmahon was subject to a pure internet-driven rumour of a takeover which the company, ASIC and the ASX tried to quash pretty quickly.
It probably just shows from a general point of view, that with social media it’s easier to spread rumours.
I don’t think Macmahon is really a takeover prospect. It’s got a substantial shareholder (Leighton) that may one day buy it out, but that’s the only reason I can think of anyone might buy Macmahon and that’s not enough to go on for me.
Echo Entertainment (EGP)
This situation has turned very positive again. Since last week, Genting Hong Kong tried to buy about 5% – that is, effectively buy the 5% stake that one of the related Genting companies sold recently – and they didn’t get the shares.
The stock has started rising again, and Genting has also applied for the right to go to 25%, which we knew, but it’s been confirmed.
So what’s changed this week is Genting’s tried to buy the 5% back. It had to sell because of potential issues about related-party transactions on shares and it’s often easier to just sell on market. The problem is, having sold, Genting’s now struggling to buy that stake back because the market knows it wants it.
As I’ve said, there’s a chance for this that Packer and Genting each buy 20-25% and seek to control the company and between the two of them, rather than a full takeover. They probably would have the majority of the board, and that wouldn’t be a bad thing for shareholders. If the two of them go from a combined total of 15% to a combined total of 50%, that’s 35% of the company that has to change hands. That’s going to push the price up anyway. So you’ve got two big players, and you can think of a variety of scenarios, but almost all would be good for the share price.
Tom Elliott, a director of Beulah Capital and MM&E Capital,may have interests in any of the stocks mentioned.
Takeover Action October 1-5, 2012
|3/10/2012||Acer Energy||CAN||Drillsearch||19.90||Extra 18.82% conditionally committed|
|4/10/2012||Bremer Park||BPK||Walker Corporation||61.91|
|3/10/2012||Clearview Wealth||CVW||Crescent Capital Management||78.10|
|1/10/2012||ENK||ENK||DMCI & D&A Income||93.80||Compulsory acquisition|
|28/08/2012||Exco Resources||EXS||Washington H Soul Pattinson||19.30|
|26/09/2012||Fisher & Paykel Appliances Holdings||FPA||Haier||37.46||Incl 17.46% lock up|
|4/10/2012||Hastings Diversified||HDF||APA Group||50.41||Recommends offer|
|24/08/2012||Hastings Diversified||HDF||Pipeline Partners||8.75|
|4/10/2012||Plan B Group||PLB||IOOF Holdings||96.05|
|29/06/2012||Real Estate Capital Partners USA Property Trust||RCU||Woolley GAL II||32.81||Incl 30.99% associates' holdings|
|21/09/2012||Thakral Holdings||THG||Brookfield Asset Management||96.89|
|1/10/2012||United Orogen||UOG||Iron Mountain Mining||78.55||Unconditional|
|18/09/2012||Western Desert Resources||WDR||Meijin Energy Group||0.00|
Schemes of Arrangement
|20/09/2012||CGA Mining||CGX||B2Gold Corp||0.00||Vote Oct 31|
|24/09/2012||Consolidated Media Holdings||CMJ||News Ltd||0.00||Binding proposal|
|6/08/2012||Integra Mining||IGR||Silver Lake Resources||0.00||Vote late Nov|
|2/08/2012||Sundance Resources||SDL||Hanlong Mining Investment||17.99||To complete in Nov 2012. FIRB approves|
|14/09/2012||WAM Capital||WAM||Premium Investors||0.00||Vote late Nov|
|1/10/2012||Arrium||ARI||POSCO/Noble Group Consortium||0.00||Unsolicited non-binding proposal|
|4/10/2012||Billabong International||BBG||TPG International||0.00||Offer not withdrawn|
|21/05/2012||PMP||PMP||TMA Group||0.00||Non-binding indicative offer|
|27/07/2012||Real Estate Capital Partners USA Property Trust||RCU||Saban Capital Group||0.00||Non-binding indicative proposal|