Bidders won’t get Arrium for a steal

Steelmaker Arrium has already knocked back the $1 billion consortium bid launched today.

PORTFOLIO POINT: Arrium investors can expect more takeover action will be in store after the company rejected the bid just launched by an Asian investment consortium.

Arrium (ARI)

The company likely better known to most people as OneSteel received an unsolicited bid over the weekend at 75c a share. Even though there are a couple of conditions on the bid, I think it’s a good looking situation and an opportunity for investors.

The bid is very credible, and comes from a consortium of Noble, the Hong Kong-based trading group, POSCO, the big South Korean steel giant, and a few Korean pension funds. Arrium chairman Peter Smedley says the board believes the proposal undervalues the company, and is highly conditional. The board has a tough negotiator in Smedley, who recently was the chairman of Spotless and led that company through a drawn-out takeover which ultimately resulted in a better deal for shareholders. So it’s a serious situation.

What makes Arrium interesting is that people think it’s just a steelmaker, whereas it’s actually a big iron ore mine which happens to have a steelmaker tacked on the end of it. That gives it an inherent value that, say, Bluescope, doesn’t have.

The bid is conditional on due diligence and finance, but given the bidders should know the company quite well, and there’s no real question that they can afford it, I don’t think this should be much of an issue. The collection of bidders is also a little unusual, but it’s the way things are going at the moment, and I’d say they want to break it up into steel, iron ore, and other components between them.

Arrium last traded at 54c before the bid, and came back on in the high-60s today to eventually close at 68c. It’s trading below the bid because the market isn’t strong at the moment, and I think there’s good buying all the way into the low-70s. It’s a credible bid, and if it goes through at 75c investors will make a profit – plus there’s every chance Smedley could eke out an increase.

Alesco (ALS)

I said last week that Alesco’s board would do a deal now the 50% threshold has been passed, and it has. Alesco really had nowhere to go, and they’ve agreed to a further 27c in dividends. This means investors will get $1.90 cash, broken up into $1.63 and a 27c fully-franked dividend, plus up to 12c a share in franking credits.

The full dividend is still conditional on Dulux getting 90% acceptances, but this is a situation now where, depending on your tax circumstances, it may be worth buying.

The reasoning is this: If you’re someone who has a lot of capital gains, occurring in the current tax year, you can buy this at around $1.92-$1.93 and take a capital loss because you’ll receive $1.63. Then you’ll replace that capital loss with a fully franked dividend on which you probably won’t pay tax, again depending on your circumstances. I would not buy it for those reasons because (a) I don’t think there are that many people with large capital gains, and (b) we’re only in the first quarter of the tax year, so you can’t really know what your tax situation is going to look like by June 30, 2013. So, while some people can improve their tax circumstances, potential investors should speak to a tax adviser.

Australian Infrastructure Fund (AIX)

I’ve done some work to estimate more details about shareholder returns on this deal, but for the time being I would still leave it alone until the payment details become clearer.

As I’ve written before, the Future Fund has bid a total of $3.20 in cash, but it’s not really a bid for AIX but the underlying assets. From that, AIX will pay out what’s left after costs, plus whatever spare cash it had in addition.

Some more information has come out, and, conservatively, it looks like investors will get $2.97 by as late as the end of April next year. Then by Christmas 2013 – a long way off – you’ll get between 22c and 28c, plus maybe a bit more and possibly some franking credits. There’s also a 5.5c dividend in early December this year, to be paid in February, with some franking credits attached. The problem is, they’ve got to realise all the assets and this could take a while because some other parties have some pre-emptive rights. Then once the money is received the Future Fund has to work out the most effective way to return it, and it’s saying 90% will be returned as soon as possible – that’s the $2.97 – while the rest will need to wait for expenses and tax rulings.

Knowing that, I wouldn’t pay more than $3.01 at the moment. You’ve got to hold this for 15 months, and that’s a long time.  At $3.01, assuming those numbers are correct, it’s equivalent to an annualised return of around 13%. That’s good, but I would wait until the pay ratios are confirmed and there’s a little more certainty because it won’t hurt to see the cash flows on this.

Ten Network (TEN)

Things are pretty bleak at the moment for free-to-air television. Nine is facing bankruptcy, Seven has had a big decrease in earnings despite being in reasonable financial shape and Ten is having some real problems in the ratings. Some recent research suggests Ten could face a breach of its banking covenants within a year if it doesn’t improve.

Whether it breaches its banking covenants, curiously, is neither here nor there. The big issue, with the share price down more than 56% year to date, is whether shareholders Gina Rinehart and Lachlan Murdoch, and possibly James Packer, could come in and buy it out.

I’d say the most likely is Murdoch. He now own 100% of DMG Radio – Nova and what is now called ‘Smooth FM’ – and under the current media ownership laws he could likely buy free-to-air TV on top of that. As for Rinehart, it’s always a mystery there but she would have the money to help participate.

Would I buy this in the hope of a bid? No, of because my fundamental rule that you should only buy something where you’re happy to own it if there’s no bid. Ten doesn’t fulfil that for me. Although it’s tempting to think that Ten has bottomed out, as we’re seeing with Nine, it could still get worse. Remember at Nine, the equity that CVC put in is now worth zero – it’s worth less than zero.

Echo Entertainment (EGP)

I can’t believe what’s happening at this company, and it’s only strengthened James Packer and Genting Casinos’ hand in any prospective takeover.

In the space of a week and a half, well-respected financier Brett Paton has resigned from the board and now there appears to have been a fight at the executive level and CEO Larry Mullin’s gone too.

Neither Genting nor Packer will do anything until they get the regulatory approval, but apparently the very latest Packer will learn of the decision is the end of this month. So in four weeks we’ll know, and the potential target board appears split. The share price went up after the announcement, and closed today at $3.82, because it’s going to be much harder for the board to oppose a bid. Echo needs to be united and present an alternative, and they haven’t got that at the moment.

I would say Echo is being extraordinarily stupid allowing this to happen while facing a prospective hostile takeover bid.

Gunns (GNS)

Finally, on a low note, there’s Gunns. You can’t buy Gunns, and haven’t been able to for months, and if you’re unlucky enough to be holding shares the best you can really hope for is a statement saying the shares are definitely worthless so you can get a tax deduction.

Sadly, the company had far too much debt. It will probably be able to sell some of its assets; it’s got a couple of saw mills. As to the Bell Bay Pulp Mill going ahead, Gunns was well connected in Tasmania and yet struggled against public opinion. If a Chinese buyer came in, as has been suggested, it’s not hard to imagine that amped up by a factor of 10.

In any case, whatever’s bought or sold will only be giving money to the banks, not shareholders. Gunns shares are definitely worthless.

Takeover Action September 24-28, 2012

DateTargetASXBidder(%)Notes
27/09/2012AlescoALSDulux Group55.19
27/09/2012Bremer Park BPKWalker Corporation61.83
24/09/2012Clearview WealthCVWCrescent Capital Management71.20
18/09/2012ENKENKDMCI & D&A Income87.70
28/08/2012Exco ResourcesEXSWashington H Soul Pattinson19.30
26/09/2012Fisher & Paykel Appliances HoldingsFPAHaier37.46Incl 17.46% lock up
27/09/2012Hastings DiversifiedHDFAPA Group45.05Recommends offer
24/08/2012Hastings DiversifiedHDFPipeline Partners8.75
20/08/2012MinemakersMAKUCL Resources3.29
26/09/2012Plan B GroupPLBIOOF Holdings89.07
29/06/2012Real Estate Capital Partners USA Property TrustRCUWoolley GAL II32.81Incl associates' holdings
26/09/2012Rocklands RichfieldRCIShandong Energy97.37Compulsory acquisition
21/09/2012Thakral HoldingsTHGBrookfield Asset Management96.87
21/09/2012United OrogenUOGIron Mountain Mining77.22Unconditional
18/09/2012Western Desert ResourcesWDRMeijin Energy Group0.00
Schemes of Arrangement
20/09/2012CGA MiningCGXB2Gold Corp0.00Vote Oct 31
24/09/2012Consolidated Media HoldingsCMJNews Ltd0.00Binding proposal
6/08/2012Integra Mining IGRSilver Lake Resources0.00Vote late Nov
2/08/2012Sundance ResourcesSDLHanlong Mining Investment17.99To complete in Nov 2012. 
14/09/2012WAM CapitalWAMPremium Investors0.00Vote late Nov
Foreshadowed Offers
20/09/2012Billabong InternationalBBGAnother party0.00Proposal withdrawn
27/07/2012Billabong InternationalBBGTPG International 0.00
11/09/2012Magellan PetroleumMGNStratex Oil & Gas0.00Not to pursue.
21/05/2012PMPPMPTMA Group0.00Non-binding indicative offer
27/07/2012Real Estate Capital Partners USA Property TrustRCUSaban Capital Group0.00Non-binding indicative offer