Arrium’s battle of nerves and steel

Investors who sold Arrium last week did well. But another takeover tilt could be coming.

PORTFOLIO POINT: Arrium is up in the air, and so is Skywest, while the takeover valve has effectively been closed at Acer Energy. Read on for more deals.

Arrium (ARI)

Last week I wrote that Arrium had become a trading stock, and that if it gets up to 84-85c then investors should consider selling. Well, it did, and I hope people sold – because soon after the consortium of bidders submitted a higher offer at 88c a share, which was immediately rejected, and the bidders apparently walked away.

From what I understand, Steelmakers Australia – the consortium made up of Noble Group, POSCO, and some South Korean pension funds – has not absolutely walked away. However the share price has pulled back and closed today at 70.5c.

Steelmakers now looks to be hoping to talk with Arrium’s major shareholders directly, and I think this is because it’s looking to pressure chairman Peter Smedley in the same way as he was at Spotless. There, shareholders put pressure on Smedley to engage with the bidders and ultimately an increase was recommended despite being at a lower price than initially was sought.

What this means for investors is an arguably good buying opportunity. It’s definitely risky, but before the bid the share price was in the low-to-mid 50s and the iron ore price had just dropped below US$90 a tonne. At the moment the iron ore price is up about US$112 a tonne and assuming it stays near that level I think the downside is pretty small – perhaps back down to 65c.

A week ago we thought we had two bids from the same group, and now it’s said it’s walking away, plus no one knows what’s going to happen in the iron ore market. So there is some risk, but if the Steelmakers consortium comes back – and I think that there’s a fair chance that they will – your upside is close to 19 cents where the second bid was, and possibly more. Compared with a downside of maybe 5-6c it’s not a bad trade.

I guess one of the things to learn from this deal is that until you’ve got actual bids on the table, as opposed to indicative bids, you’ve always got to treat it with a measure of scepticism.

Skywest (SXR)

A lot happened last week with Virgin Australia (VAH) from a deals perspective, as it essentially bulks up to go into battle with Qantas.

Firstly, Singapore Airlines is buying 10% of Virgin. Virgin then buys 60% of Tiger, and it has made an offer of a takeover bid for all of Skywest. The Australian Competition and Consumer Commission (ACCC) is going to have to look at this, but the simple fact is that whenever there are more than two airlines in Australia they start going broke. Virgin – having emerged at a time when Ansett Australia and Australian Airlines were still around – obviously realises this and doesn’t want to go broke this time around. What all this means is that I think ultimately the ACCC will have to approve the Skywest deal. I really believe they’d be nuts if they don’t, because history tells us you’re better off having two well-funded airlines than a few where some go broke.

So for investors who think the deal will go ahead, and I do, there’s quite an interesting profit to be made. Virgin is offering 0.53 Virgin shares, plus 22.5c in cash, for each Skywest share. Leaving aside any dividends, and I don’t know if either is going to be paying dividends any time soon, that equates to 47.7c per Skywest share, and Skywest is only trading at 43c – or 10% below the bid.

There are two important caveats. Firstly, to be able to lock that in against share price movement you have to be able to short sell Virgin, which is not the most liquid of stocks. Secondly, there’s the ACCC and I think the uncertainty there is the real reason it’s trading so far below the bid.

I think the ACCC will allow this. Qantas will kick and scream a bit, but even ACCC chair Rod Sims said that there were both plusses and minuses. I think the fact he acknowledged there were plusses in having a bigger, better funded, competitor airline, will overcome the nervousness about losing some competition.

Acer Energy (ACN)

Last week I wrote there was a vague possibility of a counterbid to Drillsearch’s (DLS) 28.5c on market offer. That bid would have come from Senex (SXY), which was buying on-market, but I don’t think that’s going to happen now.

Drillsearch has 58.5% of Acer, and I suspect either Senex will just sell into the bid now, or hang onto its shareholding and maybe ask for a seat on the board, hoping to play some part in whatever aspect of the company’s development it’s interested in.

From the point of other shareholders, however, there’s no counterbid coming now; there’d be no point, now that Drillsearch owns so much unconditionally.

Elders (ELD)

I’ve had several people contact me asking whether Elders was worth a look at the current price of 15.5c after it dropped more than 35% last week. Do not go near it.

Elders is now effectively controlled by its own banks. Amazingly, Ruralco (RHL) proposed to merge with Elders, which would have meant taking on all of Elders’ debt, and the banks clearly weren’t comfortable with that. I suspect what might happen is that now Ruralco will be one of the main bidders for Elders’ rural services assets as the different parts are sold off.

Ruralco owns about 12% of Elders, and I think that stake is not going to be worth anything. When you look at Elders debt and what it might get for its assets, it’s hard to see much left for equity holders. All the banks care about now is getting their money back. If Elders could sell everything for what the banks are owed plus $1, they’d do it. From a shareholding perspective, I’d stay away because chances are you’ll get nothing.

Ten Network (TEN)

Another one to avoid for me is Ten. Perpetual had over 12% of Ten at one point and it looks like they’ve now sold most of it.

Interestingly, the Ten share price actually went up afterwards, simply because the Perpetual overhang was partly known. It’s not clear yet to whom it was sold; no one has popped up with a new substantial shareholding notice, so that makes me think it has just gone to other investment funds who have bought on market.

Does it change anything for Ten? No. It’s not a vote of confidence in the company – although if Perpetual is selling, there are obviously buyers – but my feelings on this are well known. I would have thought if Murdoch or Rinehart or anyone else wanted to go after Ten, now would have been the time to get it cheaply, but I suspect they’re staying away and so should other investors.

Graincorp (GNC)

On a more positive note, GrainCorp remains one of the better takeover plays around at the moment.

Russian grain trader Summa is rumoured to be raising money for potential acquisitions, and while some say Graincorp could be a target others say it’s too expensive. All the world’s big grain trading businesses are in Australia, North America and parts of Russia and the Ukraine, but the reality is we still don’t know much about Summa.

The point is that GrainCorp still represents a rare opportunity for investors globally, let alone in Australia, and I honestly think at $12.17 where GrainCorp closed today, it is an excellent buy.

You’ve got $11.75 cash on the table. I think at the very least there will be some franking credits as part of that, and then if the board is able to extract a bit more out of bidder Archer Daniels Midland, who knows? Then if you get another player emerging, well, away we go again.

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

Takeover Action October 29-November 2, 2012

1/11/2012Acer EnergyACNDrillsearch54.62Extra 18.82% conditionally committed
26/10/2012AlescoALSDulux Group75.65
30/10/2012Bremer Park BPKWalker Corporation95.01Compulsory acquisition
5/10/2012Clearview WealthCVWCrescent Capital Management79.67
30/10/2012Discovery MetalsDMLCathay Fortune13.78Unconditional. 
2/11/2012Exco ResourcesEXSWashington H Soul Pattinson84.10Ext to Nov 16
24/10/2012Fisher & Paykel Appliances HoldingsFPAHaier37.46Incl 17.46% lock up. 
31/10/2012Hastings DiversifiedHDFAPA Group85.75
1/11/2012LinQ Resources FundLFRIMC Resources64.33FIRB approves
15/10/2012MintailsMLISeager Rex Harbour40.33
31/10/2012Neptune MarineNMSMTQ Corp0.00
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
2/11/2012Consolidated Media HoldingsCMJNews Ltd0.00Approved. Suspended
29/10/2012EndocoalEOCChina Yima Coal/Daton Group0.00Vote Feb
6/08/2012Integra Mining IGRSilver Lake Resources0.00Vote late Nov
2/08/2012Sundance ResourcesSDLHanlong Mining Investment17.99To complete Jan 2013. 
31/10/2012WAM CapitalWAMPremium Investors0.00Vote Dec 10
Foreshadowed Offers
31/10/2012ArriumARIPosco/Noble Group Consortium0.00Revised unsolicited non-binding proposal
29/10/2012EldersELDRuralco0.00To sell Elders Rural Services
19/10/2012GraincorpGNCArcher Daniels Midland14.90Trading halt. ADM seeks discussions 
22/10/2012L&M EnergyLMENew Dawn Energy71.72Lock-up agreements
21/05/2012PMPPMPTMA Group0.00Non-binding indicative offer
15/10/2012Westside CorpWCLNo party0.00Seeks firm proposals

Source: NewsBites

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