Asciano's attractive offer

PORTFOLIO POINT: New shares at a huge discount make Asciano’s capital raising attractive to investors.a

Asciano. Investors in ports and rail operator Asciano will be relieved that the group has finally released its plan to reduce its debt burden. If the $2 billion equity raising is successful the company will be able to hold on to its assets rather than flog them off. The stock will come under renewed pressure once it resumes trading but it is unlikely to retest its $1.10 lows. Investors will be well served by taking up the rights.

The good news here is that Asciano will definitely survive. The bad news for shareholders is that you are going to have to put in a lot more money to avoid being diluted.

Asciano will issue the new shares at $1.10 each, a whopping 40% discount to last Friday’s close of $1.83. The offer also includes a non-renounceable one-for-one issue to existing security holders to raise $769 million; a $231 million placement to so-called “professional and sophisticated investors” and up to $151 million in a placement to Asciano chief executive Mark Rowsthorn, who holds a 10% stake.

Asciano has had a tough time since it was spun out of Toll Holdings a couple of years ago, and with $4.9 billion in debt (of which $2.66 billion is due to mature in 2009-10) the board has spent the past nine months reviewing its options.

As recently as a week ago an asset sale looked like the only possible way out for Asciano, with four proposals on the table. The private equity bidder that had bid $4.40 a share a year ago, TPG, returned with an offer while Warburg Pincus, Global Infrastructure Partners and a Carlyle/Kaplan consortium has also prepared their own bids.

As it turns out they will all have to cool their heels after the board decided it was better off asking shareholders to put their hands in their pockets.

Asciano’s decision was no doubt influenced by the recent rally in the overall market, and the fact that it is confident enough to push through with such a big raising highlights the fact that companies are waking up to the fact they can raise money by issuing new shares. Following Rio Tinto’s new approach to recapitalisation, a lot of these deals that were looked at as recently as three months ago suddenly seem much less attractive.

Boards now believe that their companies are worth a lot more than just the current share price. As a result they weren’t prepared to sell assets at what they regarded as below market prices. Asciano has some great assets, which are worth good money, but the main problem for the company was the sheer quantity of its debt due for repayment.

China and our miners. Speaking of capital raisings, OZ Minerals did have a last-minute opportunity to opt out of its asset sale plan with China’s Minmetals, but decided against it, mainly because the recapitalisation proposals they got were not 100% guaranteed so never really came to anything. OZ was under an extraordinary amount of pressure from the banks and the Minmetals deal was always a safer bet.

With BHP Billiton and Rio Tinto’s iron ore joint venture proposal on the horizon, it’s been an interesting time for the other players in the iron ore sector, especially Fortescue, Australia’s next-largest iron ore producer, whose stock soared 30% last week.

The stock has a very mixed fan base. Some are true believers but many others, especially brokers, are far more sceptical, pointing out that the miner’s shipping tonnages aren’t that great, its margins are low and cash flow is still an issue.

The feeling is that if Rio and BHP are successful in joint venturing all their West Australian iron ore assets, they will have a clear benefit over all the other iron ore players. (For more, see Fab four iron ore juniors get a leg up).

The other positive for Fortescue is that if we’re right about China Inc (see China’s Rio tilt just a warm up) then various Chinese state-owned companies will be more likely to make takeover bids or indeed take large stakes in Australian businesses. Hunan Valin is already there on Fortescue’s register and there is every possibility it could look for a bigger share.

GRD. West Australian engineering and waste group GRD has received a non-binding takeover bid from the British engineering company AMEC. The bid is 55¢ a share and the stock is trading anywhere between 50¢ and 53¢.

Less than two years ago, GRD, which is 12.2% owned by Seven Network, rejected a bid from Transfield Services at $2.75 – exactly five times this price. The board was adamant that the company was worth more and wanted to maintain its independence.

That was back in August 2007 and here we are in June 2009 and now the very same board is being forced to consider a bid at one-fifth the price. It’s still too risky to play into this one, especially considering that the GRD board has a track record of knocking back bids and they might do it again.

Gambling and gaming. Turning to the gambling industry, Irish group Paddy Power has an agreed bid for International All Sports (IAS) whose major shareholder Mark Read has said that he’ll accept at 60¢ a share. IAS is based in the Northern Territory but the Paddy Power deal does have implications for what’s happening with gaming and gambling and wagering around Australia.

In Victoria you’ve got an old duopoly, Tattersall’s and Tabcorp. Intralot has been allowed into the gaming market via lotteries, but it has found the going tough. The main problem with gaming stocks is that they are based on state government monopolies and there is always a threat the state government will allow a second casino to be opened or make some regulatory change that threatens existing revenue streams.

The main player in the sector is Crown, which took a massive punt on overseas expansion in Macau and the US, which hasn’t played out that well. However, its Australian assets such as Crown casino in Melbourne and the Burswood casino in Perth are very good. Then you have the small things like International All Sports, which are being hoovered up by other operators. And then you’ve got the big two: Tabcorp and Tattersall’s. Both of them can either use their balance sheets to go and expand offshore or consolidate their business here, but there just aren’t that many players left in the field in Australia.

ABB/Viterra. Finally, the things are pretty quiet with the ABB/Viterra deal. The board is busy drumming up support from shareholders and after Viterra boss Mayo Schmidt’s recent visit, there’s still a lots of documentation waiting to come out before the shareholder vote in September.

The other big companies in the sector are Graincorp, which has raised money through a share purchase plan; and AWB, which failed in its attempt last year to merge with ABB. There is a growing consensus that these two may be involved in the next wave of consolidation. They can both either be targets or look to expand overseas.

If they sit there and do nothing, they’ll probably get taken over, which isn’t necessarily a bad thing for their shareholders. Then again they might merge with each other or they might decide to go and buy something in the US or Canada. But there are a limited number of things they can do, because their essential knowledge is wheat, and wheat is grown in Canada, the US, some parts of Eastern Europe and Australia.

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

nTakeover Action June 1-12, 2009
Date	Target	ASX	Bidder	(%)	Notes
10/06/09	3D Oil	TDO	Drillsearch Energy	0.00	Offer lapses.
10/06/09	Arana Therapeutics	AAH	Cephalon	89.24
12/06/09	Bonaparte Diamond Mines	BON	Minemakers	82.61
29/05/09	Bonaparte Diamond Mines	BON	Union Resources	0.00	Bonaparte advises against Union offer
13/05/09	Broadcast Production Services	BKR	Prime Media Group	77.34	Offer for the balance. Ext to June 26.
11/06/09	Consolidated Rutile	CRT	Unimin Australia	97.09	Unconditional.
20/05/09	Dioro Exploration	DIO	Avoca Resources	14.95	Dioro board rejects offer
27/05/09	Drillsearch	DLS	Beach Petroleum	13.20	Beach says offer withdrawn if Drillsearch issues shares
07/06/09	Energy Development	ENE	Archer Capital	19.99	Call option by largest shareholder.
17/04/09	Fermiscan Holdings	FER	Polartechnics	19.90	3-for-2 off-market.
11/06/09	Gloucester Coal	GCL	Noble Group	68.25
11/06/09	GRD	GRD	AMEC	0.00	Still non-binding.
11/06/09	Great Australian Resources	GAU	Sylvania Resources	19.90	Accepts increased offer.
09/06/09	Hannans Reward	HNR	Fox Resources	0.00	Hannans board rejects offer. Fox to let bid lapse.
27/03/08	Heartware International	HIN	Thoratec Corp	0.00	Subject to approvals.
29/05/09	Hutchison Telecommunications	HTA	Vodafone	52.30	ACCC greenlights offer
15/05/09	MacarthurCook	MCK	AIMS Securities	19.97
04/03/09	Murchison Metals	MMX	Sinosteel	5.85	Cleared by FIRB to move to 49.9%
02/06/09	North Australia Diamonds	NAD	Legend International Holdings	34.59	North Aust board rejects offer
09/06/09	Queensland Ores	QOL	Metallica Minerals	70.92	Offer closed.
27/05/09	Queensland Ores	QOL	Outback Metals	22.47	Withdraws. Accepts Metallica's 2.25m Metallica shares
03/06/09	Rey Resources	REY	Gujarat NRE Minerals	0.00
22/05/09	Royalco Resources	RCO	Anglo Pacific	20.10	Royalco board rejects offer
11/05/09	SA Metals	PPD	Sylvania Resources	12.89
11/06/09	Target Energy	TEX	Blaze Asset	5.14	Offer increased and extended. Target still rejects.
27/05/09	Terrain Minerals	TMX	Iron Mountain Mining	0.00	Terrain board rejects offer
Scheme of Arrangement
19/05/09	ABB Grain	ABB	Viterra	0.00	Vote September.
20/04/09	Buru Energy	BRU	Arenite	0.00	Offer Recommended.
29/04/09	Chalice Gold Mines	CHN	Sub-Sahara Resources	0.00	Vote July 1.
11/06/09	OZ Minerals	OZL	China Minmetals Corp	0.00	Merger adjusted to asset sale. Approved.
03/06/09	International All Sports	IAS	Sportsbet	0.00	Vote late September.
09/06/09	International Goldfields	IGC	NKWE Platinum	0.00	Merger adjusted to asset sale.
03/06/09	Jackson Minerals	JAK	Scimitar Resources	0.00	Approved.
11/05/09	Lion Nathan	LNN	Kirin Holdings Company	46.00	Vote Sept/Oct.
22/05/09	Macquarie Communications Infrastructure	MCG	Canada Pension Plan Investment Board	0.00	FIRB clears. Vote June 17.
08/05/09	NSX	NSX	New Zealand Stock Exchange	0.00	Recapitalisation. Target 50.1%. Vote June.
12/06/09	UCMS Group	UMS	Aegis BPO Services Australia	0.00	Vote July 16.
03/06/09	Uranio	UNO	Manhattan Resources	0.00	July 20.
Backdoor Listing
30/03/09	Jupiter Mines	JMS	Pallinghurst Res & Red Rock Res	43.68	Approved.
28/05/09	Metminco	MNC	Hampton Mining	34.66	Offer unconditional. To acquire 51% of unlisted Hampton. Change of control. Approved.
28/05/09	Dia-B Tech	DIA	Pallane Medical		$15m capital raising launched
Foreshadowed Offers
16/03/09	Asciano	AIO	Multiple expressions of interest	0.00	Interest for parts of business/recapitalisation.
28/10/08	Becton Property	BEC	Several unnamed parties	0.00	Due diligence starts.
03/02/09	Felix Resources	FLX	Several expressions of interest	0.00	Discussions continue.
09/02/09	Gold Aura	GOA	Anomaly Resources	0.00	Discussions.
16/03/09	Progen Pharmaceuticals	PGL	Cytopia	5.00	Cytopia seeks removal of board.
04/02/09	Redflex Holdings	RDF	Unnamed parties	0.00	Unsolicited indicative proposals - still inadequate.
27/02/09	Ventracor	VCR	Two unnamed parties	0.00	Discussions continue.
20/04/09	Viridis Clean Energy Group	VIR	Unnamed party	0.00	Discussions.
30/12/08	Vision Group	VGH	Several unnamed parties	0.00	Non-binding conditional offers.

Source: NewsBites