Billabong isn't washing for shareholders

PORTFOLIO POINT: Billabong shareholders have been caught short, but the action at Cons. Media is more positive, and Arrium is still worth a look.

Billabong (BBG)

As was partly expected, and I suggested last week, TPG has walked away from its indicative bid for Billabong following due diligence. I don’t know what this means for the company, or for shareholders now, but the signs aren’t good.

Billabong shares were smashed on the news; down 16.5% on Friday to 84 cents, and continuing the slide to close at 78c today. Two private equity firms looked at it and both have decided they don’t want to proceed – and that’s made everybody nervous about whether they found something really horrible. We may never know what happened, why the bidders walked away, but I think there will be more people heading for the exits.

There is some confidence to be drawn from the new chief executive, Launa Inman, and the incoming chairman Ian Pollard – it’s a fresh-looking Billabong now. However, there’s no easy solution to the woes of retailing at the moment and it’s been a heck of a ride down for shareholders.

As to whether the company is still a takeover target, the answer is yes and no. In some ways it still qualifies as a target, because it’s had two indicative bids, and you’ve got a strategic shareholder in Gordon Merchant who says he’s happy to take a bid. On the other hand, two private equity firms have had a look at it and walked away. In fact, TPG made a bid and then walked away only to then come back with another bid and walk away again. Bain (widely presumed to be the second bidder) seems to have looked at it and walked away very quickly. It all just says to me that, in its current form, the company is broken.

Consolidated Media Holdings (CMJ)

The other major takeovers news of the week is a much more positive story.

The Australian Competition & Consumer Commission, as I expected, has made it clear that Seven Group Holdings (SVW) would not be allowed to buy Cons. Media because essentially the regulator doesn’t want a free-to-air TV operator also owning a controlling interest in Foxtel.

Seven Group chairman Kerry Stokes, who owns 25% of Cons. Media, has indicated he will accept News Corp’s $3.45-a-share bid, which already had the support of 50%-owner James Packer. So it’s a fait accompli for News Corp and the stock is trading steadily at $3.43-44 and that’s probably the right price. Investors will get their money in about four weeks, and people might trade it for a couple of cents, but it’s not really worth playing at this price.

What it does mean, however, is that James Packer and Kerry Stokes now have a substantial amount of money to funnel into various other places. For Packer, that’s $1 billion that can go into Crown and that in turn makes Echo Entertainment (EGP) more of a target. For Stokes it may be a question of what he’s allowed to look at.

There’s a chance Stokes will invest the money internally, and I’ve read reports suggesting he wants to prepare Seven for internet protocol television, delivering its product online, and gain a march on the broadcast-only rivals. Or it could go to producing more content, which all the networks probably need to do rather than just re-broadcasting other people’s content. However it could also go into an acquisition. He would be allowed to buy newspaper or radio assets in cities other than Perth, so it’s not impossible he might buy a stake in Fairfax. The national papers might complicate things in WA, however. He could look at radio via APN, or even at Prime Television (PRT), which already broadcasts much of Seven’s content and would be an easy buy with a $300 million market cap – provided the ACCC allowed it.

One final point is that this decision would also appear to put Ten Network (TEN), chaired by Lachlan Murdoch, out of reach for News Corp. It’s a question of pay TV owners also owning free-to-air TV, and after this bid News Corp will own half of Foxtel.

Arrium (ARI)

Arrium traded right up into the low-80s last week on the 75c consortium bid, and we took profits. However, it’s since dropped back to close today at the bid price, and I think it’s a buy again.

Up to 77c a share, investors would be paying a 3% premium or thereabouts over the current bid price, and that’s usually my limit.

I think it had run a bit hard to be honest. In the current market, for the stocks to go 10% above the bid after just a few days is slightly over-optimistic. Given that no deal is completely solid at the moment, I would have thought a small discount to the bid would be appropriate. However, people have realised that they – POSCO, Noble Group and some pension funds – want Arrium and 75c isn’t going to get it now the iron ore price has firmed.

Anywhere from 75c to 77c is a very reasonable price for investors. The downside is probably only 3% and it’s highly likely the bid will improve.

Acer Energy (ACN)

There may be a bidding war brewing in the energy industry. Drillsearch (DLS) has an on-market bid at 25.5c, and now Senex Energy (SXY) has bought a 6.4% stake on market.

Clearly Senex is doing that because they reckon the bid is going to higher, and while, again, my rule is normally not to pay too much over I think this one is worth a punt. There is pretty much a contested position now and, at 29.5c where it closed today, I think it’s probably worth it. The downside is quite large – in the region of 12% – but if Senex have bought in, and they’ve obviously paid a higher price, I think it’s highly likely that they’re going to do some sort of a counterbid or at least force Drillsearch to pay up.

Both of these bidders are industry bidders and likely see some synergies a private equity firm couldn’t, and most importantly they’ve already spent money. The potential counterbidder here has put down money and actually bought more than 6% of the company, and that’s different from just saying “we’ll have a look at it”.

Discovery Metals (DML)

The company has formally rejected Cathay Fortune’s $1.70 cash bid, and while the stock has firmed a little it’s still trading at a 3-4% discount, closing today at $1.665.

Cathay’s statement didn’t really say what it would do, whether the offer would be reconsidered – it just said Cathay was disappointed. My view is that it probably will come back, but the only problem I have here is that I don’t know anything about the bidder. There’s no real history of how it operates here in terms of takeovers.

So on the one hand the board is rejecting it and saying it’s inadequate, which would normally be good, but I would be inclined to just to sit and wait until we can learn some more about Cathay Fortune.

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