BHP/Rio story has just begun

BHP Billiton and Rio Tinto. The battle for Rio is heating up. Marius Kloppers, the chief executive of BHP, is in the middle of an international road show. There are three groups of people he needs to get on side to get the Rio deal over the line. First and foremost: the Rio shareholders. Rio has probably more shareholders in the UK than it does in Australia, so he has to go and convince them. He's got to convince major BHP shareholders that he's doing the right thing; that he's not overpaying for an asset. He's also got to start talking to the various regulators: European, American, Australian and so forth. His plan is to create a company that would dominate some areas of trade and he needs to make sure that the various anti-trust and anti-monopoly regulators understand why that's OK and, most importantly, that they won’t try to block the merger. Third, he needs to talk to his customers, including Chinese, Japanese and Korean steel mills; the market is focusing on iron ore because that is an area in which these two companies really dominate.

Now as it stands the mills can’t really do anything about the takeover and they don’t really have a lot of choice about who their suppliers are. But over the weekend China Business Journal ran a story in which it speculated that China Investment Corporation (CIC), which is a bit like China’s version of the Future Fund, is considering launching its own bid for Rio Tinto. The story said the sovereign fund, along with Baosteel, Shougang Group and Angang Group, will join forces to make a cash bid for Rio Tinto, which would need to be more than $150 a share and perhaps as high as $200. The story was flatly denied earlier today by CIC, but this kind of rumour shows just how seriously the Chinese steel makers are taking this bid. Despite all assurances to the contrary, these guys are really worried that a merged entity would put even more pressure on prices.

This kind of news will mean that we should see Rio Tinto have another run. (Rio has risen 8% today, November 26, to close at $1.38.) I thought it was very interesting last week that the spread between BHP and Rio narrowed quite considerably. Very early on, I think on the second day after the bid was announced, Rio Tinto shares traded at a 14% premium to the value of the bid. Now of course it's a scrip bid (three BHP shares for every Rio share), so the actual value goes up and down with the BHP share price, but the premium or the spread came back to about 5–6%.

Nylex. There had been no shortage of new takeover bids as we’ve seen with the announcement of a bid for Nylex on Friday night, November 23. In fact, as someone who trades takeovers for a living, I've never seen so many bids at the same time. After the credit crunch in August, everybody said, 'Oh, that's the end of private equity and leveraged buy-outs’, but that simply has not been the case. Now Nylex has had a troubled past and the company is only worth a fraction of what it used to be. Lo and behold CHAMP Private Equity has appeared and lobbed a $2.65 bid on to the table. Shares were trading for around $1.84 on Friday so that’s a premium of about 44%.

Now the company's board has recommended the bid, in the absence of a higher one. It's a good price, notwithstanding the fact that the company's profits are on the way up. My feeling is there's probably a better than even chance someone else might look at this. Nylex is a very strong brand and we have all witnessed this shift to water tanks and drought-proofing products. There are several companies that would find Nylex attractive. Hills Industries has a water products division, European companies, US private equity '¦ there are lots of potential counter-bidders. If Nylex trades anywhere around $2.65 or a bit under, it's probably a pretty good buy.

Jubilee Mines. Xstrata has put together a $23 a share bid for Jubilee Mines. Xstrata was the under-bidder for Western Mining all those years ago when it was acquired by BHP. As is stands, Xstrata holds about 16.5% of Jubilee and once it gets to 50% the bid will go unconditional. There is still a very good chance that someone else will emerge with a bid here. Jubilee is a diversified resource company. That’s very attractive to a cashed-up company like Zinifex or even Oxiana. There are plenty of potential buyers here and the stock is trading for about $23 so the downside is negligible.

Babcock & Brown Environmental Infrastructure. This is one of the Babcock & Brown satellite funds that hasn’t performed so well. The share price has fallen so much that Babcock & Brown came in with an offer based on convertible notes; these debt instruments are called BNBG. The notes interestingly are a pretty good buy, because groups like us have been short-selling them to hedge an entry into the stock. Because people can now get cash, the notes fell from $101.50 to about $97.50. There's no need to short-sell them any more, because people can just get 50¢ cash. So those notes, if you're interested in looking at a listed debt investment, are actually trading 3–4% below their intrinsic value. Now again, this is a small gain, but a safe one and that is what we look for.

Sydney Attractions Group. Sydney Attractions Group, formerly the Sydney Aquariums Group, has rejected a revised offer from Village Roadshow. The initial bid from Village was $5.96, was raised to $6.50 and has been declared final and unconditional. Village owns about 25% of Sydney Attractions but its unlikely that it will be able to acquire the rest. In my experience, when a company makes a bid, gets a substantial stake but doesn't succeed, invariably it will come back. So once this bid closes and let's say the stock just drifts off again. It's perhaps not a bad longer-term buy because you can bet your bottom dollar that Village will come back and want to mop up the remainder of the company.

Viking Industries. This is another opportunity that investors might want to look at. I need to disclose that my company is actually a substantial shareholder in this one. Now they have an agreed bid of $1.09 on the table and the stock is trading for about $1.04, which is about a 5% gain. This has been recommended by the board and subject to a vote sometime in January. This is another one of those opportunities that the market has overlooked. If you look at this as generating that 5% return over three months then your internal rate of return or your annualised return is something like 20%.

Tom Elliott is a director of MM&E Capital. He may have an interest in any of the stocks mentioned.

nTakeover Action November 19-23, 2007
Date	Target	ASX	Bidder	(%)		Notes
16/11/07	Auckland International Airport	AIA	CPP Investment Board (Canada Pension Plan)	0.00		CPP proposes 39.53% partial offer.
3/09/07	Auspine	ANE	Gunns	60.80		Unconditional.
12/07/07	Avantogen	ACU	Chopin Opus One LP	84.98		Diluted from 87.62%.
27/08/07	Becker Group	BKR	Prime Television .	76.04		Unconditional. Extended to July 26.
19/11/07	Beyond International	BYI	Mariner Financial	22.25
13/11/07	Consolidated Minerals	CSM	Pallinghurst Resources/AMCI	5.46		$3.30 recommended cash offer. Extended to November 27.
23/11/07	Consolidated Minerals	CSM	Palmary Enterprises	14.78		Closing December 7.
10/09/07	Golden China Resources Corp	GCX	Sino Gold Mining	16.90		Lock-up agreement and pre-bid agreements.
23/11/07	Golden West Resources	GWR	Fairstar Resources	22.69
20/11/07	GoldLink Growth Plus	GLC	Tidewater Investments	8.10
23/11/07	Gujarat NRE Resources	GUJ	India NRE Minerals	96.91		Closing November 30.
23/11/07	Jubilee Mines	JBM	Xstrata	16.19		FIRB approval received.
21/11/07	Kimberley Diamond Co	KIM	Gem Diamonds	81.49		Closing November 26.
19/11/07	Lighting Corporation	LCL	Gerard Lighting	19.00		Closing December 7.
21/11/07	Mackay Permanent Building Society	MPB	Wide Bay Australia	34.16		Revised offer.
10/10/07	Midwest Corporation	MIS	Murchison Metals	2.80
12/10/07	New Privateer Holdings	NPH	Magellan Financial	36.03
22/11/07	PCH Group	PCG	Cape Plc	56.96		Extended to November 29.
28/02/07	Queensland Gas	QGC	TCW/Societe Generale	0.00
7/11/07	Resource Pacific	RSP	New Hope Corporation	0.00		Revised offer.
23/11/07	Sydney Attractions Group	SAQ	Village Roadshow	25.54		Extended to November 17.
20/11/07	travel.com.au	TVL	Webjet	19.90		Offer lapses.
15/10/07	travel.com.au	TVL	Wotif	19.95
22/11/07	Unwired Group	UNW	Seven Network	83.60
nScheme of Arrangement
20/11/07	Adelaide Bank	ADB	Bendigo Bank	100.00		Suspended.
29/10/07	Anzon Australia	AZA	Arc Energy	53.10		Anzon Energy , with 53.1%, will vote in favour. Vote January 2008.
8/11/07	Beyond International	BYI	Navis Media	<5.00		Ceases to hold in excess of 5%.
25/10/07	Bolnisi Gold NL	BSG	Coeur D'Alene Mines Corp	19.99		Vote December 4.
9/11/07	Coates Hire	COA	National Hire Group, Carlyle Group	0.00		Vote December 11.
17/10/07	Colonial First State Private Capital	CFI	SunSuper Superannuation Fund	18.75		Vote November 30.
24/10/07	Home Building Society	HME	Bank of Queensland	0.00		Vote November 30.
20/11/07	Mackay Permanent Building Society	MPB	Bank of Queensland	0.00		Terminated.
6/08/07	Oriel Communications	OCO	FCP Brencorp	0.00		75% acquisition proposed. No vote date set. Implementation agreement signed.
8/10/07	Panbio	PBO	Inverness Medical Innovations	0.00		Vote December 17.
29/10/07	Perseverance Corp	PSV	Northgate Minerals Corp	0.00		Vote mid-January.
26/10/07	Symbion Health	SYB	Healthscope	11.10		Revised scheme. Vote November 30.
2/10/07	Viking Industries	VKI	Provik shareholder consortium	28.38
10/10/07	Visiomed Group	VSG	Clinical Cell Culture	0.00
nForeshadowed Offers
26/09/07	Atlas Group	AHS	Unnamed parties	0.00		Balron offer rejected. Other discussions continue.
5/11/07	Blue Energy	BUL	Sydney Gas	0.00		Discussions.
12/06/07	Great Southern	GTP	Unnamed party	0.00		Expression of interest.
2/07/07	Great Southern	GTP	Unnamed parties	0.00		Interest from other partes - following previous expression of interest.
27/06/07	Health Corporation	HEA	Unnamed party	0.00		Non-binding terms sheet.
5/11/07	Nufarm	NUF	China National Chemical Corp	0.00		Non-binding proposal.
9/11/07	Rio Tinto	RIO	BHP Billiton	0.00		Offer rejected.
17/10/07	SkyCity Entertainment	SKC	Unnamed party	0.00		Conditional approach. Due diligence started. Extra party undertakes due diligence.
24/09/07	Style	SYP	Unnamed party	0.00		Confidential approach from international private equity.
29/06/07	Warehouse Group	WHS	Woolworths	0.00		NZ Commerce Commission declines approval of an offer. Woolworths appeals to NZ High Court.
29/06/07	Warehouse Group	WHS	Foodstuffs Co-operatives	0.00		NZ Commerce Commission declines approval of an offer. Foodstuffs appeals to NZ High Court.
nBackdoor Listing
26/09/07	Mark Sensing	MPI	Sonofax Holding	63.00		Share sale agreement expected October. Vote due November.