Bolton rides again

PORTFOLIO POINT: He was singularly successful in his encounter with BrisConnections, now Bolton has bought a big slice of a Multiplex fund.

Multiplex. It appears Nicholas Bolton is about to do a “BrisConnections” on the Multiplex Prime Property Fund. You’ll remember that Bolton did very well out of BrisConnections, where he was able to take a $4.5 million fee for his voting rights and handball the liability he had for the $1 call.

Much like BrisConnections, Multiplex Prime Property Fund is trading at a fraction of a cent. The ASX code is MAFCA, which tells you straight away that it’s a partly paid security, like BrisConnections. It has a 60¢ call due on it and Bolton has bought just under 6% so far for about $18,000, so it hasn’t cost a great deal.

It’s a bit of an embarrassing fund and of course Multiplex itself was taken over some time ago by the Canadian company Brookfield. The fund in question has just four assets and probably far too much debt.

It seems Bolton is going to try and leverage his reputation in order to get something done here. He is probably hoping Brookfield will come in and just mop the thing up at 5¢ a share or something like that. He could invest $60,000-odd and buy 20%, but of course he’s got that same issue with the liability hanging over his head.

These sorts of plays involve considerable risk. Remember, last time it was only Bolton that made money out of it: all the other people that followed him in at 0.1¢ had to pay the liability and are being chased down in the courts.

There’s an old investment philosophy called 'Follow the Leader’. It meant if Kerry Packer did something, you copied it, and of course millions of people try and copy what Warren Buffett does, usually with limited success. One thing about Nick Bolton is that he will act in his own best interests, not necessarily everybody else’s. Only Bolton made money out of BrisConnections. So, in this case, don’t follow the leader. It’s a very risky play and is by no means certain to succeed.

Santos. The coal seam gas sector has probably been the most fertile area for merger activity in the past year and I think the number of big players in Queensland will go from three to two. At the moment, the big players are BG, Santos and Origin, who are buying lots and lots of little players.

There’s a huge consolidation going on; and the latest target was Eastern Star Gas, which had been on my radar for some time. It had a 20% shareholder called Hillgrove Resources and Santos bought Hillgrove’s stake. Eastern Star Gas was trading at 80–81¢ a share and Santos paid $1 a share to get part of this company, which has a bit of acreage in the coal seam gas world.

Santos paid about $170 million for Hillgrove’s stake in Eastern Star. Santos has said it has no intention of taking over the company, but that could change very quickly. Santos at some stage will either want to put the Eastern Star assets together with its own or just take it out.

Santos plans to develop a joint venture LNG facility with Petronas in Gladstone, which will involve billions of dollars in additional capital expenditure. At the moment BG, Santos and Origin are all building separate coal seam gas plants and trains, but they’re all using the same technology and it would make sense for them to work together.

The mostly likely end game here is a merger between Origin and Santos; I’ve thought this for a while. There are big complications with such a merger and possibly some competition issues too: given that Origin is a mixture of an oil/gas producer and a utility company it would probably have to demerge those assets at some point.

A merger might be an actual corporate merger, or it could be like what you’ve seen with Rio Tinto and BHP’s joint venture in the Pilbara, which is an easier way of merging particular interests without having to merge entire companies. The other issue Santos has, of course, is the unstable mud volcano in Indonesia, which it had a hand in creating. The company says it’s completely off the hook but I don’t really believe that. You just don’t know how these things will play out.

Gunns. Timber products group Gunns has taken a 17.9% stake in Forest Enterprises Australia just last Friday at 10¢ a share, highlighting the timber industry’s turmoil following the collapse of managed investment scheme operators Timbercorp and Great Southern.

Forest Enterprises is a timber company and an MIS company so in that sense it’s similar to Gunns, which is the same thing, just bigger. I’ve always thought Forest Enterprises was something Gunns would take over at some point.

As the strongest player in the timber business, Gunns is now overwhelmed for choice with literally dozens of separate managed investment scheme operators desperate to avoid going to the wall, but a lot of them aren’t worth taking over.

So Gunns can cherry-pick assets. It can go to the receiver, look at the assets and say, 'We like that one, that one and that one’. Gunns has a lot to choose from and the price of the deal was telling. It got a considerable discount of 25% or more to get its stake at 10¢ a share (unlike Santos which paid a premium) which shows you it’s buyer’s market out there.

Macquarie. Macquarie is getting out of the infrastructure fund business. Last week, shareholders in Macquarie Communications Group approved the $3 a share bid from a Canadian Pension group and the stock will actually stop trading on Tuesday. I think Macquarie has realised that the structure of these things just isn’t right for these times any more. They have too much leverage, the flow of fees back to Macquarie is too big and investors don’t get the kind of return they expect.

Macquarie Communications Group still has its links back to Macquarie Group, though, which might be seen as undesirable. One option for the Canadian Pension group is to internalise the management. It could buy back Macquarie’s management rights, which would mean cutting a big cheque to Macquarie Bank. It would need to do a capital raising and probably change the name as well.

Just remember that Macquarie will only be bought out at what it thinks is a fair value, so it’s debatable whether just merely being bought out creates lots of value for investors. So, you have to ask whether you effectively want to be buying from Macquarie. I’m not certain what the answer is here.

This brings into question the potential future of Macquarie Airports and Macquarie Infrastructure Group, which is their oldest spin-off and essentially a toll road owner. You will probably see something happen with both these groups as a result. Either their management will be internalised or Macquarie will put out tenders within the next financial year, possibly even in the next six months because Macquarie has made a fundamental shift in how it views these things today.

Energy Developments. There is also an interesting bid on the table from private equity firm Archer Capital for Energy Developments but it’s not a firm bid at this stage. Archer has made a non-binding, conditional and incomplete proposal to buy the firm in the $2.40–2.80 range, and the stock was quite happy to trade around $2.30.

This was because Archer has made these sorts of bids in the past and walked away from them. Its bid for Funtastic was one example. Now Archer has come around and said the bid is $2.80 and it’s subject to due diligence and some discussions with its lenders.

At $2.30 you are buying at a 22% discount to the bid and the reason it’s not trading higher is because of Archer’s history. Before the bid emerged it was trading around $1.60 so there is considerable downside here.

Criminal trials seek to prove beyond a reasonable doubt, and I like bids where it’s beyond a reasonable doubt that something will eventuate. This is not one of those cases. It’s probably better than 50/50 so you need to take that into account.

There is another issue, which is Energy Developments’ European wind, power and gas assets. It has said there has been a partial bid for them, but won’t divulge from whom. If you look at the dollar amount for that partial bid, it implies a much greater value for the company.

So you’ve got one group that wants to buy the European assets and you’ve got another group, Archer, which wants to make a bid for the whole thing. I think the board thinks the company is worth at least $3 a share, but the job for them is to go out and get it now.

It’s an interesting situation where you have got one-and-a-half bids on the table, without the full story behind either and yet the company is definitely in play.

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

nTakeover Action June 29-July 3, 2009
Date	Target	ASX	Bidder	(%)		Notes
26/06/09	Arana Therapeutics	AAH	Cephalon	93.06
24/06/09	Bonaparte Diamond Mines	BON	Minemakers	84.99
30/06/09	Bonaparte Diamond Mines	BON	Union Resources	7.91		Offer closed.
23/06/09	Broadcast Production Services	BKR	Prime Media Group	77.34		Offer for the balance. Ext to Aug 28.
19/06/09	Consolidated Rutile	CRT	Unimin Australia	98.78		Unconditional.
20/05/09	Dioro Exploration	DIO	Avoca Resources	14.95		Dioro board rejects offer.
29/06/09	Drillsearch	DLS	Beach Petroleum	14.53		Drillsearch rejects offer.
07/06/09	Energy Development	ENE	Archer Capital	19.99		Call option by largest shareholder.
01/07/09	Fermiscan Holdings	FER	Polartechnics	22.46		Terminated by Fermiscan.
16/06/09	Gloucester Coal	GCL	Noble Group	87.71
11/06/09	GRD	GRD	AMEC	0.00		Still non-binding.
11/06/09	Great Australian Resources	GAU	Sylvania Resources	19.90		Accepts increased offer.
27/03/08	Heartware International	HIN	Thoratec Corp	0.00		Subject to approvals.
25/06/09	MacarthurCook	MCK	AIMS Securities	34.84
04/03/09	Murchison Metals	MMX	Sinosteel	5.85		Cleared by FIRB to move to 49.9%
01/07/09	North Australia Diamonds	NAD	Legend International Holdings	39.59		North Aust board rejects offer.
16/06/09	Pacifica Group	PBB	Bosch Group	76.60
09/06/09	Queensland Ores	QOL	Metallica Minerals	70.92		Offer closed.
17/06/09	Rey Resources	REY	Gujarat NRE Minerals	0.00		Rey rejects offer.
22/05/09	Royalco Resources	RCO	Anglo Pacific	20.10		Royalco board rejects offer
11/05/09	SA Metals	PPD	Sylvania Resources	12.89
11/06/09	Target Energy	TEX	Blaze Asset	5.14		Offer increased and extended. Target still rejects.
26/06/09	Terrain Minerals	TMX	Iron Mountain Mining	15.40		Offer closed.
Scheme of Arrangement
19/05/09	ABB Grain	ABB	Viterra	0.00		Vote September.
29/04/09	Chalice Gold Mines	CHN	Sub-Sahara Resources	0.00		Vote July 1.
03/06/09	International All Sports	IAS	Sportsbet	0.00		Vote late September.
11/05/09	Lion Nathan	LNN	Kirin Holdings Company	46.00		Vote Sept/Oct.
24/06/09	Lion Selection	LST	Catalpa Resources	0.00
03/07/09	Macquarie Communications Infrastructure	MCG	Canada Pension Plan Investment Board	0.00		Approved. Implementation July 21.
30/06/09	Sylvania Resources	SLV	Ruukki Group	0.00		Vote October.
12/06/09	UCMS Group	UMS	Aegis BPO Services Australia	0.00		Vote July 16.
03/06/09	Uranio	UNO	Manhattan Resources	0.00		July 20.
Backdoor Listing
30/03/09	Jupiter Mines	JMS	Pallinghurst Res & Red Rock Res	43.68		Approved.
19/06/09	Metminco	MNC	Hampton Mining	34.66		To acquire 51% of unlisted Hampton. Extended to July 8.
28/05/09	Dia-B Tech	DIA	Pallane Medical	0.00		$15m capital raising launched.
Foreshadowed Offers
03/02/09	Felix Resources	FLX	Several expressions of interest	0.00		Discussions continue.
09/02/09	Gold Aura	GOA	Anomaly Resources	0.00		Discussions.
16/03/09	Progen Pharmaceuticals	PGL	Cytopia	5.00		Cytopia seeks removal of board.
04/02/09	Redflex Holdings	RDF	Unnamed parties	0.00		Unsolicited indicative proposals - still inadequate.
27/02/09	Ventracor	VCR	Two unnamed parties	0.00		Discussions continue.
20/04/09	Viridis Clean Energy Group	VIR	Unnamed party	0.00		Discussions.
30/12/08	Vision Group	VGH	Several unnamed parties	0.00		Non-binding conditional offers.

Source: NewsBites