Boiling point at Billabong

PORTFOLIO POINT: The chances of getting a good takeover wave into shore at Billabong are rapidly receding.

Billabong (BBG). Private equity group TPG has come back and made another bid, of sorts, for Billabong – but there’s substantial risk involved. It’s still conditional upon due diligence, which Billabong has granted, and the offer of $1.45 a share could be revised up or down.

The Billabong board has said the offer is too low at $1.45, however TPG has already bought a stake of 14.5% from two fund managers. Now, this is not an unconditional purchase – instead, what it has done is essentially buy an option over the stake with agreements to split some of the upside in the event TPG lifts its bid or another bidder emerges. It’s a way of kicking the company into play, but allowing the fund managers to retain some of the upside.

The original bid at $3.30 a share earlier this year valued the company at about $850 million, and the new bid at $1.45 puts it a bit under $700 million because the capital raising put a lot of new shares in the mix. So in terms of equity market cap it’s about 20% less than the original bid.

The stock closed at $1.365 today, and that’s firstly because due diligence might reveal things have worsened and cut the price, and secondly because the board’s rejecting it and TPG could still walk away. Whether this bid will go ahead is hard to say, but it will come down to a battle between the new CEO Launa Inman versus shareholders just taking the money and running.

It’s possible other private equity firms could be interested, but given TPG made the first bid and is following up now I’d say it’s unlikely. Another retailer could, but I doubt it. Most retailers have a tough enough job at the moment that they’re not really in a position to be buying each other.

I think it will ultimately go ahead, but if it does it will have to be at a slightly higher price. At the moment we don’t even have a proper bid on the table, so this is risky. And one of my rules is that you should be happy to own a stock in the absence of a bid, and I’m not sure that’s the case with Billabong at the moment.

The board’s on shaky ground here, though one positive is the capital raising has paid down a lot of debt so Billabong’s not under immediate balance sheet pressure. It’s going to come down to whether Billabong can convince the market it’d be better off backing the board’s strategy – and, let’s be honest, the board hasn’t exactly covered itself in glory here.

It’s good news if you took up shares at $1.02 in the raising – you’ve got an instant profit on them, and if I’d taken up a lot at $1.02 I’d be inclined to sell. 30% in a few weeks is pretty good.

Northern Iron (NFE). It looks like a competitive bidding war could be emerging for Northern Iron.

Indian conglomerate Aditya Birla initially offered an indicative $1.23-29 per share range for the company back in May, which the board knocked back. It returned last week and sweetened the deal, offering $1.40 a share – valuing the company at over $500 million – in another indicative proposal that is conditional on due diligence.

However today saw a counter-bid emerge from Swiss group Prominvest, which came over the top offering $1.42 a share – also conditional on due diligence. Prominvest has requested exclusivity, which the Northern Iron board has indicated it will not provide, but the board said it would provide due diligence, meetings and site visits to Aditya, and to Prominvest if the exclusivity condition was withdrawn.

The miner’s main asset is a Norwegian magnetite iron ore project – Sydvaranger – which currently produces slightly over two million tonnes a year and should ramp up to almost six million tonnes by 2016.

Northern Iron shares are up about 10% today at $1.15, and while the upside looks reasonable, the market is likely concerned these deals aren’t going to complete. Given the conditionality of the bids, and the state of iron ore and coal markets, this is a reasonable assumption.

It is surprising, however, just how deeply discounted the market is trading with two bids on the table. It just shows how mistrustful the market is at the moment where there’s any uncertainty.

Hastings Diversified Utilities Fund (HDF). APA has come back with a bid notionally worth $2.50 following ACCC approval, and this is something the market well and truly predicted. Hastings shares were trading at $2.50 before, and closed today at $2.55, and I think the market is still being overly optimistic (see last week).

APA’s bid is 60c and the remainder scrip, but it hasn’t outlined the ratio, and there’s a fair chance APA’s scrip could weaken again. The other bidder, PPA, is all cash $2.325 a share and I think they’ll just sit tight at the moment and see exactly what the bid is. It may well be that the bid said to be worth $2.50 is only worth $2.35 if the share price takes a small dive.

So I think there’s a good chance PPA could increase its bid as well, but from everything I’ve seen $2.55 to $2.60 is where it starts to get hard for them to make the required rate of return. Given the market’s paying $2.53 I think it’s pricing in most of the potential gains already.

The positive thing here is you’re not going to lose much, no matter what happens. You’ve got two bidders, one with a cash offer on the table. What’s interesting is looking at this in terms of what it could mean for other stocks. Some of the targets I like are Transurban (TCL), which has been a potential target for a while, and SP Ausnet (SPN). The latter is a gas and electricity distributor, but it’s got that same nice regulated rate of return you can pretty well bank on.

I expect that groups like PPA will only be more and more active trying to buy long-term regulated infrastructure assets with a reliable cash flow.

Alesco (ALS). This bid is caught between a rock and a hard place now, and I maintain that I’d be selling out.

Dulux (DLX) has declared its bid is final, and Alesco has said it doesn’t agree and won’t be paying the 42c franked dividend to provide the franking credits, so there’s not a lot of wriggle room.

I have been thinking it may be possible for Dulux to change its bid from $2.05 with the magical 18c of franking credits to a little more cash – say $2.15 – and a little less credits. I think the Takeovers Panel would have a hard time with that, but having said that it wouldn’t want to stand in the way of something that offers a better deal for shareholders.

Alesco’s gone to the Takeovers Panel itself claiming the bid is structured in a misleading way, but a lot of this stuff is just trying to be obstructive – to tie the other side up in formal litigation. The bid is confusing, but I think shareholders are capable of working it out, and in any case the board has rejected it.

Consolidated Media (CMJ). Kerry Stokes’ potential bidder for the rest of Cons. Media looks to be Seven Group Holdings (SVW), not Seven West Media (SWM). You might doubt Seven West’s ability to bid for Cons. Media, and you’d be right to doubt that because it’s got some real problems, Seven Group is the much stronger arm of the two.

All that’s happened is the ACCC has asked Seven Group for more information before making a decision on whether or not it would be allowed to bid. From what I can gather News Corp’s bid of $3.50 a share is on track

This one looks good to me. The stock’s $3.40 you’ve got about 3% upside. There’s the possibility of Seven Group being allowed to bid, it’s a very strategic asset so News Corp will definitely push ahead with it, and there don’t appear to be any issues with News because it’s already a shareholder in Foxtel.

Unlike Alesco where I can’t see the two sides coming together, trading at the bid, this one is trading below and I think there is a chance of an increase. And if nothing else happens except News Corp’s bid goes ahead you’ll get $3.50 a share.

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

Takeover Action July 23-27, 2012
Date	Target	Code	Bidder	(%)	Notes
13/07/2012	Alesco	ALS	Dulux Group	29.93	Ext to Aug 7
29/06/2012	Austock Group	ACK	Mariner Group	0.00	Withdrawn
16/07/2012	Castlemaine Goldfields	CGT	Lion Selection	24.70
12/07/2012	Clearview Wealth	CVW	Crescent Cap Management	11.60
23/07/2012	Genesis Resources	GES	Clancy Exploration	10.90	Ext to Aug 20. Uncond.
25/07/2012	Hastings Diversified	HDF	APA Group	20.71	May lift offer
18/07/2012	Hastings Diversified	HDF	Pipeline Partners	8.10
27/07/2012	Minemakers	MAK	UCL Resources	1.02
26/07/2012	Norton Gold Fields	NGF	Zijin Mining Group	40.31	FIRB approved
20/07/2012	Orion Metals	ORM	Conglin Investment Group	68.90	Closed
29/06/2012	Real Estate Capital Partners USA Property Trust	RCU	Woolley GAL II	32.81	Incl associate's holding
16/07/2012	Rocklands Richfield	RCI	Shandong Energy	51.10	Pre-bid agreement
04/06/2012	Thakral Holdings	THG	Brookfield Asset Management	38.58
Schemes of Arrangement
16/07/2012	Q Technology Group	QTG	GWA Group	0.00	Terminated
27/07/2012	Spotless Group	SPT	Pacific Equity Partners	19.64	Suspended
22/06/2012	Sundance Resources	SDL	Hanlong Mining Investment	17.99	To complete Nov 2012
Foreshadowed Offers
23/07/2012	Beach Energy	BPT	Origin Energy	0.00	Rumour in media
21/05/2012	PMP	PMP	TMA Group	0.00	Non-binding indicative offer
27/07/2012	Real Estate Capital Partners USA Property Trust	RCU	Saban Capital Group	0.00	Non-binding indicative offer
13/07/2012	Whitehaven Coal	WHC	Tinkler Group	48.30	48.3% in shares expressed

Source: News Bites