Billabong deal could still wear thin

A new proposal is on the table, but there’s downside if the parties walk away.

Summary: While new interests are sizing up Billabong, and they appear to be a good fit, there is still risk for investors. The company’s shares are still trading well below the proposed offer price.

Key take-out: The 10-15% of upside doesn’t necessarily warrant the downside potential if both bidders walk away.

Key beneficiaries: General investors. Category: Portfolio management.

Billabong (BBG)

Shortly after Eureka Report published last Monday evening, an alternative proposal for Billabong surfaced – the fifth approach in 12 months for the ailing surfwear company. However, I really don’t think this changes anything for investors and I would continue to stay away.

The new offer from clothing company VF Corporation, known for the North Face, Vans, Riders and Nautica brands among others, and private equity firm Altamont Capital Partners, proposed $1.10 a share cash for the company, and “is subject to due diligence and conditional upon a number of other matters equivalent to those in the [pre-existing] proposal”. The company has granted due diligence and former North American head Paul Naude is already doing due diligence on a potential leveraged management buyout with Bank of America Merrill Lynch, also at $1.10 a share.

The problem is, both of these bids are in the very early stages; they’re both just doing due diligence. The shares jumped up to $1.02 in the week, but some reality is setting in and Billabong closed today at $1.005, still 10% shy of the bid. I think the fact VF/Altamont aren’t overbidding Naude – instead lobbing at the same price, subject to due diligence – tells you they’re not overly keen to get it.

VF does already have a variety of leisurewear brands, and Billabong would fit in, and there’s also talk of a potential break-up of the assets. But, as we’ve seen, every time a group gets in the data room to look at this company they find things not to like. We don’t know if it’s market data, demographics, or something else – the problem is that it’s not a bid until it’s a bid. When these sorts of highly conditional bids or proposals are made, the bidders don’t have to give any reasons to walk away.

Granted, Naude knows the company inside out, and you’d think his bid would be likely to go through. But remember he’s got private equity backers, and they might not be as committed to it, or view it as favourably, as him. The proposal from VF is partnered with private equity as well, and we just don’t know the situation there.

So, I don’t think it’s a buy; in fact, if anything, I think it’s a sell. I don’t think the 10-15% of upside here warrants the downside potential if both these groups walk away.

Adelaide Brighton (ABC), Boral (BLD)

There have been rumours this week of a renewed look at a merger between these two building products companies. Would a merger make sense? Yes it would. Will it happen? Probably not.

Boral attempted a takeover of Adelaide Brighton in 2004, but it was blocked by the ACCC on the grounds it would reduce competition in cement and aggregate products and the like. The reality is, though, it’s a commodity market.

Building supply companies have a really tough business. They’re essentially price takers. If you manufacture cement here, it’s energy intensive and someone else will just dump it here for a cheaper price. Cement imports have more than doubled since the ACCC ruling.

So it probably makes sense for them to merge, just to keep them both going, but will it happen? I wouldn’t speculate on it – simply and primarily because it’s not an industry I would want exposure to in the absence of a merger. In any case, it would supposedly be a merger of equals, which means that there’s no real premium in it.

WHK Group (WHK), SFG Australia (SFG)

Speaking of mergers of equals, it’s been reported in the press that the merger between Shadforth Financial Group and WHK Group might fall apart. (For disclosure I was formerly a director with Snowball Group, which merged with SFG.)

Since this deal was announced, WHK’s share price has done nothing, and SFG’s has gone up. What was supposed to be a merger of equals is now looking unbalanced – it was close to 50/50 but now would be more like 60/40.

The fact is, they’re similar businesses, and the two would go well together. Arguably WHK is more accounting, and SFG is more financial planning and super, but clearly the management thought they would go well together too. It never got beyond the exploration phase, and there were never any terms announced, but it seems to be nothing more complicated than SFG improving with the market and the other wealth management stocks.

Broadly though, I would consider both of these companies to be potential targets in the sense that I think this industry is almost guaranteed to grow. It doesn’t mean every participant will grow, some will do better than others, but SFG is still an attractive target, and if they merge with WHK I reckon one of the big banks will probably have a look at it. One problem is that neither stock is particularly liquid, and they tend to trade by appointment. IOOF (IFL) and Perpetual (PPT) are still preferred targets in this sector, too though.

Wealth management is one of these areas that banks have not historically done very well in, but it’s a diverse and relatively unregulated sector into which it would be natural for banks to expand, because there’s not much else they can expand into.

Australian Infrastructure Fund (AIX)

As expected, and as I outlined last week, shareholders have approved the $2 billion sale of assets to the Future Fund. Importantly for investors, there are still small gains to be made here.

The terms of the deal have not changed. Shareholders can expect to get between $3.19 and $3.23 cash plus up to 5 cents of franking credits, which AIX is confident it can pay out. That means for investors who can use franking credits, it’s still a good buying opportunity up to $3.13.

The bulk of the payout is expected in April, and the remainder between June and December. It’s a tight payment range, but it’s safe. If the money is paid out early, the internal rate of return equates to around 16-17%.

Takeover Action December 17, 2012 - January 11, 2013

DateTargetASXBidder(%)Notes
18/12/2012AlescoALSDulux Group95.61
23/10/2012Clearview WealthCVWCrescent Capital Management62.70
7/01/2013Contango CapitalCCQContango Microcap74.80
5/12/2012Discovery MetalsDMLCathay Fortune13.78Unconditional. Board rejects
12/12/2012EngencoENGElph0.00
18/12/2012Firestone EnergyFSERange River Gold0.00
30/11/2012Globe InternationalGLBMariner Corporation0.00Board rejects offer
8/01/2013L&M EnergyLMENew Dawn Energy89.33Incl lock-up agreements
8/01/2013LinQ Resources FundLRFIMC Resources71.45FIRB approves
15/10/2012MintailsMLISeager Rex Harbour40.33
4/01/2013Neptune MarineNMSMTQ Corp80.06Unconditional
29/06/2012Real Estate Capital Partners USA Property TrustRCUWoolley GAL II32.81Incl 30.99% holding
1/10/2012United OrogenUOGIron Mountain Mining78.55Unconditional
4/01/2013Wentworth HoldingsWWMAustralian Renewable Fuels20.81Incl 19.81% pre-bid
25/10/2012Wilson HTMWIGMariner Corp0.00
Schemes of Arrangement
23/11/2012CGA MiningCGXB2Gold Corp0.00Vote Dec 24
9/01/2013Cortona ResourcesCRCUnity Mining0.00Court approves
6/12/2012EndocoalEOCChina Yima Coal/Daton Group0.00Vote Feb. FIRB approves
11/01/2013Integra Mining IGRSilver Lake Resources0.00Scheme implemented
6/12/2012SkywestSXRVirgin Australia0.00SCI, Singapore, approves
5/12/2012Sundance ResourcesSDLHanlong Mining Investment17.99Vote Feb 1
13/11/2012Texon PetroleumTXNSundance Energy Australia0.00Vote Feb
13/12/2012Premium InvestorsPRVWAM Capital0.00Court approves
Foreshadowed Offers
4/12/2012GraincorpGNCArcher Daniels Midland19.90Revised indicative offer
8/01/2013Westside CorpWCLUnnamed party0.00Discussions continue
26/10/2012WHK GroupWHGSFG Australia0.00
Source: NewsBites