Billabong hangs ten

Uncertainty continues as the surf wear group stretches out takeover talks.

Summary: The Billabong board is considering a 60c bid as analysts wonder if the surf wear sector is well past its peak and warn the company will continue to struggle. Meanwhile, Woodside's decision to shelve Browse suggests that project costs in Australia are too high.
Key take-out: The downside at Billabong is still materially greater than the upside.
Key Beneficiaries: General Investors. Category: Portfolio Management

Billabong (BBG)

There are not many positives here for investors as Billabong continues exclusive talks with the Paul Naude and Sycamore Consortium for another 10 days, according to its latest market missive  today. The best bet you’ve got is 60c if the deal goes ahead, and if it doesn’t I wouldn’t hesitate to get out.

The consortium has bid 60c a share for the company, and I think if the deal is firm the board will back it. They’ve had a long chance to look at the business by now, and you would think the deal is firm, but this is by no means certain. The price has already been cut by more than half from $1.10, closing at 48c today, and I can’t see the consortium walking away now but you never know.

Billabong has been in a downward spiral, and every time you think things are as bad as they’re going to get, it gets worse. There are plenty of people out there who think the stock is worth nothing. As I wrote two weeks ago (Billabong board balances the bids), at least one successful figure believes the entire surf wear sector has peaked.

Gordon Merchant will almost certainly take equity in the bidding vehicle, so he’ll still be around, but the best shareholders can really hope for at the moment is 60c.

I’d be a seller of some here (if anyone still has them) as the downside is materially greater than the upside.

On an interesting side note, it looks like Colorado may be sold or floated in the near future after going bust a while back. That’s come out of administration, and probably is in better shape, so there can be life after death.

Woodside (WPL)

I recently wrote that investors might look to take some money off the table in the latest Woodside rally (Making hay from Graincorp) and the company yesterday sent a clear signal it is no longer focussing on growth.

After shelving the big James Price Point Browse Basin LNG project in WA a week ago, the company has now announced a special dividend of 51c a share. It is clear expansion is off the table, and it is all about improving shareholder returns in the short term.

In the short term that’s obviously good, but looking at the bigger picture, it raises some concerns. Woodside needs projects like Browse to provide earnings 10 or 20 years down the track. Obviously it feels it’s just too expensive to do things in Australia at the moment, and that is very worrying. We’ve got these internationally traded resources in the ground - and in the sea - and the approvals to get them. But these big projects are just not getting up.

However, the payment of the special dividend does also make it more likely Shell will be looking to sell its stake shortly. For Shell, this short-term spike based on a higher dividend, and potentially some other capital management, is probably as good as it is going to get. I think Shell will now be really actively looking at selling, either to a bidder or just to the market.  This will be something for takeover followers to watch.

On the whole however, I think this is still a selling opportunity. It is good for the short-term, and the market is excited because it sees a dividend – but that won’t be paid every year. It’s a one-off and I think what it’s really telling us is that Australia is an uneconomic place to do business, and most of Woodside’s assets are in Australia. Woodside closed today 1.7% higher at $38.62.

iiNet (IIN)

I have written several times before that iiNet is one of my favourite takeover targets, for all the opportunities that come from the National Broadband Network and the second-tier telcos seeking scale. Sure enough it was revealed in the week that M2 Tellcommunications and iiNet were in talks last year.

Now, although these talks didn’t proceed anywhere, the big  point is M2 and Macquarie Telecommunications have always been about business-to-business. However the recent sale of consumer brands Dodo and Eftel at the cheaper end of the spectrum highlights where the growth is.

Assuming the NBN goes ahead, it makes everybody equal in broadband and I don’t believe the Coalition’s plan changes things very much. The structural issues won’t change, it’s more a technological issue; and whether it’s copper from the node to the house or fibre Telstra will essentially become a competing retailer like everybody else.

Morevoer, there are very valid economic reasons for the consolidation to occur. All the minor telcos are hitting record highs as well – if you look at the share prices in Macquarie, Amcom, iiNet, even Telstra, they have all gone up dramatically over the past year and a half. Everything at the moment is just confirming this sector as one for investors to pay attention to.

Echo Entertainment (EGP)

Along with Woodside, I also recently wrote investors may look to trim back on Echo stock (see previous article) – and I haven’t changed my mind about that.

The good news is that KT Lim, head of Malaysia’s Genting which holds a strategic stake, has flown into Sydney and he wants to talk to Echo, the regulator, and probably the government too. So Genting is still interested. It’s noteworthy that neither Genting nor Crown has received permission to increase their stakes in Echo yet, despite both applying some time ago. The regulator is supposed to be independent, but I can really only think it is waiting to see what the NSW state government decides to do. The regulator would look a bit silly if it gave the green light to increased stakes just to have the government turn around and grant Crown (CWN) a second casino license.

It all comes back to the government, and no one knows what is going to happen there. Clearly Genting is still interested (and may remain interested even if there is a second licence) but, whatever happens, the strategic appeal of Echo is reduced if a second licence is granted. It’s still not clear, and it’s a flip of a coin really until it is. Under those circumstances, Echo looks like more of a sell than a buy at current prices.

Virgin Australia (VAH)

The Australian Competition and Consumer Commission (ACCC) gave the all-clear for Virgin’s takeover of Tiger Australia yesterday.

There’s not much to add here, except that while this is good from a business perspective it really surprised me from a consumer perspective. People wonder why we only have two supermarkets and four banks – and now if they wonder why we only have two airlines – it’s because the ACCC says it’s alright. As a business person, it means the ACCC aren’t making things too difficult and that’s great – these duopoly structures are apparently OK. But it is indicative that the ACCC just isn’t pushing the interests of the consumer that hard. It seems like the ACCC mentality is that Tiger will probably go bust and leave us with two airlines anyway, so it’s just throwing up its hands and saying nothing can be done. And here we are back with a two airline policy.


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

Takeover Action April 11-24, 2013

DateTargetASXBidder(%)Notes
24/04/2013Central Australian PhosphateCENRum Jungle Resources0.00See also Foreshadowed Offers
23/04/2103EftelEFTM2Telecommunications Group93.80
12/04/2013EngencoEGNElphinstone Group65.06
12/04/2013Firestone EnergyFSERange River Gold27.42
10/04/2013LinQ Resources FundLRFIMC Resources97.35Delisted
18/04/2013Merlin DiamondsMEDInnopac Holdings6.93
18/02/2013United OrogenUOGIron Mountain Mining22.93Unconditional
Schemes of Arrangement
19/04/2013Avocet ResourcesAYELion One Metals0.00Vote May 27
12/04/2013Kumarina ResourcesKMRZeta Resources0.00Vote May 16
15/04/2013Norfolk GroupNFKRCR Tomlinson0.00Vote July 17
Foreshadowed Offers
21/03/2013Billabong InternationalBBGAltamount/VF Consortium0.00Indicative proposal
24/04/2013Billabong InternationalBBGExec Paul Naude-Sycamore Consortium0.00Exclusivity ext to May 8
24/04/2013Central Australian PhosphateCENMonument Mining0.00Non-binding indicative proposal
4/12/2012GraincorpGNCArcher Daniels Midland19.90Revised indicative offer
5/03/2013Westside CorpWCLUnnamed parties0.00Discussions continue
24/04/2013WHK GroupWHGSFG Australia0.00Non-binding indicative proposal. Discussions continue. Trading halt

Source: NewsBites