Arrium not off the steel menu

The Steelmakers consortium walked away from Arrium, but another play is possible.

PORTFOLIO POINT: The Steelmakers consortium could come back for Arrium, but it’s now in the prospective takeover category.

Arrium (ARI)

The Arrium board put out a statement during the week, outlining the two main reasons they rejected the Steelmakers consortium bid of 88c a share.

The first point was that the offer was highly conditional, but I think that could have been dealt with. The second is a more fundamental point. Arrium pointed out the stock traded as high as 88c as recently as August, and that’s true, as well as averaging a few research reports that suggest 88c is only equivalent to a 2014 (or year-and-a-half) forward P/E of four times. At 73c, where the stock closed today, it’s about three to four times the current P/E.

On the one had you can look at that and say it looks incredibly cheap, and there’s no way Arrium could accept an offer priced so cheaply. On the other hand, so much of what the stock is worth depends on the iron ore price. Remember also that the company has a lot of debt, so if the iron ore price heads south again there won’t be a P/E because there won’t be an ‘E’ – there’ll just be losses.

My suspicion here, however, is that the Steelmakers consortium will seek to come back. They’ve said they won’t at the moment, but they don’t really have to be held to that because there was never actually a formal bid on the table.

However, I think Arrium is more in the prospective takeover category now. The price is not much above where it would have been anyway – so I don’t think there’s much downside from this point in regards to the bid – but it is a stock now subject to the whims of the iron ore price and other issues. If the iron ore price fell again, the stock wouldn’t hold up without the bid putting a floor under it. I think the bidders may return, so there’s still something there, but it’s definitely a riskier play at the moment. (See Alan Kohler's Arrium note on Saturday)

Sundance Resources (SDL)

The long anticipated takeover for Sundance Resources by China’s Hanlong (Africa) Mining Investment Ltd (Hanlong) has taken a welcome turn today.

After many delays, and the changing price of the bid (from an initial 50c, up to 57c and then down to the current 45c), Sundance has just released the scheme booklet for a shareholder meeting to vote on the proposal. The meeting is scheduled to take place on Dec 14, and assuming at least 75% of Sundance’s shareholders vote in favour of the scheme, the 45c consideration should be paid around Jan 8, 2013.

As with all takeovers, the decision whether to buy into the bid at the current market price of 38c (a 15.6% discount to the takeover consideration of 45c) depends on how likely the bid is to proceed. According to the scheme booklet, two key regulatory approvals – from Australia’s Foreign Investment Review Board (FIRB) and China’s National development & Reform Commission (NDRC) – have now been received. Still outstanding are the necessary approvals from the governments of the Republics of both Congo & Cameroon, i.e., the two countries upon whose territory the proposed Mbalam-Nabeba Iron Ore Project rests.

While approvals from both these African nations cannot be guaranteed, Chinese investment in that part of the world is incredibly important to economic growth and prosperity. Given this, it’s unlikely that either the Cameroonian or Congolese authorities would want to offend Hanlong buy rejecting the Sundance deal, meaning that at 38c Sundance shares remain a strong speculative buy for investors prepared to tolerate a degree of African sovereign risk.

Whitehaven (WHC)

A lot of people are still wondering what’s going to happen with Whitehaven, where a takeover is still not entirely out of the question.

I did a bit of reading during the week, and it’s becoming clear that Farallon Capital (which is somewhere between a hedge and a private equity fund) has a Singapore subsidiary that’s leant Nathan Tinkler a lot of the money he’s borrowed against his Whitehaven stake. The problem is that with Whitehaven’s share price below $3 a share – it closed today at $2.93 – the approximate value of what Tinkler has borrowed is believed to be getting close to the value of the shares with the debt against them.

Whitehaven is not doing particularly well. Tinkler tried to spill the board there, and didn’t succeed, because why would anybody put him in charge? It’s now evident he doesn’t have the support he needs and there’s every risk that Farallon Capital will lose patience with him and just takes his shares.

If that happened, and someone offered say $3.50, Farallon would probably take it. But Farallon doesn’t want to put Tinkler out of business, because that’s how it makes its money – by lending money to entrepreneurs and co-investing with them. Tinkler would not accept such a low price for his shares, so what’s it’s going to come down to is essentially how brave his banker is.

As always with prospective targets, investors should watch the strategic shareholding, and if those shares get seized, then look for a takeover bid.

Skywest (SXR)

I think Skywest is a much better deal than the market is giving it credit for, and by that I mean I think it’s quite likely to go ahead.

Everybody is very nervous about what the Australian Competition and Consumer Commission (ACCC) will do here, and it can be a difficult beast to anticipate, but I think ultimately Virgin Australia’s (VAH) bid for Skywest will be supported. That means there’s still more than 10% upside in the Skywest share price, which closed today at 44.5c, because as I explained last week the deal is worth almost 50c a share.

You do need to have confidence in the regulator allowing this one, but there’s significant upside in the share price if it does. I think the ACCC knows it’s better to have a profitable, well-capitalised competitor to Qantas than a series of small ones slowly going broke. The simple fact is that it’s a tough market, and Qantas is a tough competitor, so this is really one way of making Virgin a more vigorous competitor.

Northern Iron (NFE), Western Desert Resources (WDR)

Northern Iron was a target that had been speculated about for some time. It had two prospective bidders, Aditya Birla Group and Prominvest, and they both did their due diligence, had a look at it, and walked away.

It’s possible that experience that might have made the Arrium board think twice about allowing a group in to do due diligence, and getting everybody’s hopes up, only to then find that it all amounted to nothing – other than competitors getting more information about the business.

I don’t know what they saw that they didn’t like – it may have been the shaky iron ore prices, or there may have been something wrong with the company’s operations, but whatever it was they couldn’t complete the transaction. Now Northern Iron has to just deal with things by itself.

A similar thing happened with the Western Desert offer from Meijin Energy Group, which also fell apart recently.

The simple explanation is that these deals were launched with iron ore at one price, and in the past six months or so that price fell a lot. The whole economics of the deals have been undermined, and it’s no more complicated than that in my view.

GrainCorp  (GNC)

Nothing has happened this week, but I firmly remain of the opinion this is a great buying opportunity.

The share price has just stayed steady – at a time when the market has been a bit soft – and closing today at $12.20 I think it’s an excellent buy at this price.

At the very worst, I think they will tweak the existing bid to have the same amount of cash but more franking credits, but I do think in fact they will end up putting a higher bid on the table.

Yellow Brick Road (YBR)

Finally, Macquarie Group (MQG) has announced a tie-up with Yellow Brick Road to fund mortgages. Does this make YBR a takeover target? Well, maybe.

Chairman Mark Bouris sold Wizard years ago and did very well out of that. So, he’s a businessman, and he’s happy to sell assets at the right price. However, I would have thought this is a case where he wants to build the business, and Macquarie wants to do it with him. The combination of good distribution channels with Macquarie’s massive financial backing should be able to create a pretty competitive business.

In the short term, I don’t see a takeover, because they’ll wait and see if the business works. But in the longer term, if it does, Macquarie is now the obvious buyer.


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

Takeover Action November 5-9, 2012

DateTargetASXBidder(%)Notes
8/11/2012Acer EnergyACNDrillsearch74.09Extra 18.82% conditionally committed
2/11/2012AlescoALSDulux Group76.70
5/10/2012Clearview WealthCVWCrescent Capital Management79.67
30/10/2012Discovery MetalsDMLCathay Fortune13.78Unconditional. 
9/11/2012Exco ResourcesEXSWashington H Soul Pattinson89.07Ext to Nov 16
6/11/2012Fisher & Paykel Appliances HoldingsFPAHaier90.0
1/11/2012Hastings DiversifiedHDFAPA Group85.75Ext to Nov 14
7/11/2012LinQ Resources FundLFRIMC Resources65.34FIRB approves
15/10/2012MintailsMLISeager Rex Harbour40.33
7/11/2012Neptune MarineNMSMTQ Corp19.51
29/06/2012Real Estate Capital Partners USA Property TrustRCUWoolley GAL II32.81Incl 30.99% associates' holdings
1/10/2012United OrogenUOGIron Mountain Mining78.55Unconditional
30/10/2012Western Desert ResourcesWDRMeijin Energy Group0.00Offer not proceeding
25/10/2012Wilson HTMWIGMariner Corp0.00
Schemes of Arrangement
20/09/2012CGA MiningCGXB2Gold Corp0.00Vote late in year
29/10/2012EndocoalEOCChina Yima Coal/Daton Group0.00Vote Feb
6/08/2012Integra Mining IGRSilver Lake Resources0.00Vote late Nov
9/11/2012Sundance ResourcesSDLHanlong Mining Investment17.99Vote Dec 14
31/10/2012WAM CapitalWAMPremium Investors0.00Vote Dec 10
Foreshadowed Offers
6/11/2012ArriumARIPosco/Noble Group Consortium0.00Board rejects proposals
19/10/2012GraincorpGNCArcher Daniels Midland14.90Trading halt. ADM seeks talks. 
22/10/2012L&M EnergyLMENew Dawn Energy71.72Lock-up agreements
21/05/2012PMPPMPTMA Group0.00Non-binding indicative offer
15/10/2012Westside CorpWCLLiquefied Natural Gas0.00Due diligence
15/10/2012Westside CorpWCLNo party0.00Seeks firm proposals from others

Source: NewsBites