PORTFOLIO POINT: The surf is up at Billabong again, but shareholders will have to wait to see where the takeover current takes them this time.
There’s some good news for investors on the Billabong rollercoaster ride, as this morning the company announced the head of its US business, Paul Naude, is looking at making a buy-out.
One of my key indicators of takeover targets is whether there has been a previous unsuccessful bid, because statistics show that roughly half the time either the same bidder or another bidder returns. We all know the story behind Billabong now, turning down a bid from private equity group TPG at $3.30, a share price plunge, and two indicative private equity bids at $1.45 walking away after due diligence.
Now Naude has six weeks to examine it to see if he can get financing, and the stock has risen from 74c to close at 81.5c today. The board has said he needs to stand down as both director and president of the American business, obviously, because he is now a potential buyer.
There’s no price mentioned; the board has simply said that any proposal will need to provide sufficient information, but, the point is, it’s good. You’d think the bid would have to be at least $1.45, but that’s almost twice where the stock was trading on Friday, and I don’t think the board would feel completely hamstrung by that. It’s hard to speculate on price, but I would say it’s almost certain to be north of $1. Whether that’s $1.10 or $1.40, I don’t know.
There’s no deal on the table yet, but if someone this close to the company – and Naude would know as much about it as pretty much anybody – is starting to see value emerge, then that’s a very positive sign. There’s a real risk he won’t be able to get financing, but on the other hand it’s unlikely he would have gone public and made his intentions clear without being 80% of the way towards locking in financing. In addition, there are also patchy signs of a pick-up in consumer confidence generally, especially here in Australia, and Christmas will be an important time to watch.
All this leaves Billabong in no-man’s land at the moment. This should be the third or even fourth takeover offer in the space of a year. Whether this one goes any better than the others, or lobs at a price the board or Gordon Merchant could approve, is hard to say.
In all, it’s very positive, and the stock has gained less than I would have thought. In fact, I would say it’s a speculative buy at the moment, because it hasn’t risen by much and I think there’s a pretty decent likelihood some sort of a deal could get up here. There are plenty of risks, but I think they are well and truly priced in.
Graincorp reported its profit last week, which was very good, and there’s a small thing that I think is almost certain to happen here. The company announced an increase in the dividend, and while the final dividend is 20c, it’s really 35c because of a special dividend on top.
So there’s 35c of fully-franked dividends, going ex-div next Tuesday. Archer Daniels Midland has not made it very clear yet about whether its $11.75 bid includes dividends or not, and remember it’s still in the early stages of negotiations. My feeling is that ADM, to try and sweeten its deal, will allow shareholders to keep the 35c dividend and still get $11.75.
On top of that, I think a big chunk of the $11.75, probably at least another 50c or more, can be treated as a fully-franked dividend, which will add some more franking credits into the mix.
If you add $11.75 and 35c you get $12.10 cash, and the stock has mostly been trading around $12.20-25, though it ticked up toward the end of trade today to close at $12.35. I reckon it’s almost certain ADM will not include the dividend, and on top of that I think they can hand out some franking credits, and on top of that I think they can increase the $11.75.
Looking at other recent deals around the world, such as when Glencore bought Viterra, or Viterra bought ABB, they went for about 10 times EBITDA. At 10 times the EBITDA just announced, that would put Graincorp at roughly $14. I’m not sure it could go that high without a competitive bidder, but it could certainly go to $13.
So, again, I would reiterate that at $12.20 or so Graincorp is exceptional value.
Neptune Marine (NMS)
I haven’t really looked at this deal before because it’s just a small one, but I think there might be a chance of some gains here.
Neptune Marine is a company that obviously fell on hard times, and it’s got a takeover offer of 3.2c a share from a subsidiary of MTQ Corporation. It’s only got a market cap of about $60 million, but the point is it’s trading at 3.1c to 3.2c a share and the board is yet to decide whether or not they’ll recommend it. A statement is expected on November 30. I would have thought, if you can get stock at 3.1c, your worst case is you’ll make 3.2c, which is almost a 3% gain.
However, I reckon there’s a chance the bidder might tip a little bit more on the table here to get it across the line. It’s a Singaporean company bidding, and I don’t know much about it, but if you can buy slightly below the bid then that’s not a bad little gain. The only catch is it’s not very liquid, so you couldn’t do it with a lot of money – a million shares is only $31,000.
Finally, Fairfax did the right thing last week when it sold a small US agricultural publishing business I suspect a lot of people didn’t even know it had. The amount of money involved is relatively small, just under $80 million, but the good thing is it’s consistent with what Gina Rinehart and other people, institutional shareholders like Simon Marais, have been saying. They’re all saying that assets sales have to be considered.
This one was a small and easy one to do, but the fact that the board is now doing it makes me think that they’re more likely to consider other asset sales. That definitely improves their profile as a takeover target.
Frankly, it could still be a takeover target in its current form, as other people might look to come in and sell the assets, but either way it says to other groups to get in now. Whether the core business of Fairfax can be improved is another question, but the board is showing it can sell off the things around it and I think that would pay down debt and hopefully push the share price considerably higher.
The obvious moves are to sell the remaining stake in Trade Me, which is separately listed, not really interlinked with the rest of the company, and for which they would get a very good price, and then there are the radio assets.
Basically, the sale of the US asset shows a willingness to sell, and either it might spur on those who are contemplating a takeover into action, or the company will just do it itself.
Tom Elliott, a director of Beulah Capital and MM&E Capital, may have interests in any of the stocks mentioned.
Takeover Action November 12-16, 2012
|15/11/2012||Acer Energy||ACN||Drillsearch||89.06||Extra 18.82% cond committed|
|5/10/2012||Clearview Wealth||CVW||Crescent Capital Management||79.67|
|30/10/2012||Discovery Metals||DML||Cathay Fortune||13.78||Unconditional.|
|12/11/2012||Exco Resources||EXS||Washington H Soul Pattinson||91.12|
|6/11/2012||Fisher & Paykel Appliances Holdings||FPA||Haier||90.0|
|16/11/2012||Globe International||GLB||Mariner Corporation||0.00|
|15/11/2012||Hastings Diversified||HDF||APA Group||95.84|
|14/11/2012||LinQ Resources Fund||LFR||IMC Resources||66.37||FIRB approves|
|15/10/2012||Mintails||MLI||Seager Rex Harbour||40.33|
|7/11/2012||Neptune Marine||NMS||MTQ Corp||19.51|
|29/06/2012||Real Estate Capital Partners USA Property Trust||RCU||Woolley GAL II||32.81||Incl 30.99% assoc holdings|
|1/10/2012||United Orogen||UOG||Iron Mountain Mining||78.55||Unconditional|
|15/11/2012||Wentworth Holdings||WWM||Australian Renewable Fuels||19.81||Pre-bid|
|25/10/2012||Wilson HTM||WIG||Mariner Corp||0.00|
|Schemes of Arrangement|
|20/09/2012||CGA Mining||CGX||B2Gold Corp||0.00||Vote late in year|
|28/09/2012||Cortona Resources||CRC||Unity Mining||0.00||Vote Dec 21|
|29/10/2012||Endocoal||EOC||China Yima Coal/Daton Group||0.00||Vote Feb|
|6/08/2012||Integra Mining||IGR||Silver Lake Resources||0.00||Vote late Nov|
|9/11/2012||Sundance Resources||SDL||Hanlong Mining Investment||17.99||Vote Dec 14|
|13/11/2012||Texon Petroleum||TXN||Sundance Energy Australia||0.00||Vote Feb|
|31/10/2012||WAM Capital||WAM||Premium Investors||0.00||Vote Dec 10|
|6/11/2012||Arrium||ARI||Posco/Noble Group Consortium||0.00||Board rejects proposals|
|15/11/2012||Graincorp||GNC||Archer Daniels Midland||14.90||Offer undervaluing|
|22/10/2012||L&M Energy||LME||New Dawn Energy||71.72||Lock-up agreements|
|15/10/2012||Westside Corp||WCL||Liquefied Natural Gas||0.00||Due diligence|