BREAKFAST DEALS: Angling for Arrium

Steelmakers Australia shifts focus to South Australia's halls of power, and what will Nathan Tinkler do next?

From what we can tell, South Australian Premier Jay Weatherill doesn’t own any shares in Arrium, but Steelmakers Australia is talking to him anyway. What’s going on here? Also in resources, it’s Nathan Tinkler versus the rest over at Whitehaven Coal, with almost the entire register not owned by the former electrician declining to join his crusade. Meanwhile, we know who’s selling Ten Network stock (but who’s buying?), Drillsearch has got Acer Energy for real and Australian private equity firms are having some trouble deploying their billions.

Arrium, Steelmakers Australia

The Asian consortium that will no longer seek to engage the directors of Arrium has instead opted to engage South Australian Premier Jay Weatherill.

Representatives of Steelmakers Australia, led by Hong Kong's Noble Group and South Korea’s POSCO, were granted a request to meet with the Premier. Arrium’s Whyalla steel factory is found at the state’s Whyalla port, while the company also has iron ore assets across the South Australia.

The pitch by Steelmakers Australia is that one of its main members, POSCO, has a technology that cuts coking coal from the steelmaking process. This obvious reduces emission, but also cuts costs, giving Whyalla a more sustainable future when steel plants are being hit by lowcost overseas competitors, waning demand from China and a high Australian dollar.

Arrium has disputed the idea that POSCO’s technology could aid the Whyalla plant. But you can see the apparent strategy of Steelmakers Australia. The target’s board wouldn’t engage at 88 cents a share, up from 75 cents, so they’re exploring the national interest avenue.

While the bidders would be well aware that Weatherill doesn’t have much influence over the Arrium register, and he’s since indicated that he’s staying out of this one, Steelmakers Australia can at least make sure that they’re unlikely to run into a wave of protectionism if they come back for another crack.

This morning, The Australian’s Bryan Frith makes the observation that the consortium took the unusual step of asking to speak to Arrium’s lenders about its debt levels. The writer points out that this is not the usual approach for suitors.

"The consortium has suggested that it suspects Arrium is carrying more debt than is appropriate and it wants to talk to the banks about what should be the level of capital in the company,” says Frith.

"But why parties with such deep pockets would need to do that is not readily apparent. Posco has a market capitalisation of $30 billion and Arrium should be petty cash for the state-owned South Korean entities.”

Arrium chairman Peter Smedley was right to play hardball with Steelmakers Australia. The timing of the bid was very opportunistic.

Additionally, suggestions that Arrium might be able to employ the ‘bear-hug’ tactic that Pacific Equity Partners (PEP) used successfully on Spotless Group, which Smedley used to chair, are misguided.

Arrium’s register is packed with retail shareholders, a tribute to its BHP Billiton legacy. Spotless had a register with many institutional shareholders keen to grab a quick buck in lean circumstances. Plus, PEP was the second suitor to come along, adding to the pressure to talk.

Whitehaven Coal, Nathan Tinkler

About two-dozen protesters were escorted from the Whitehaven Coal annual general meeting, but they weren’t there to stand against the apparent ineptitude of the board and management that major shareholder Nathan Tinkler has been banging on about.

In fact it was stunning to see how few supporters Tinkler had. With the young mining tycoon holding 19.4 per cent of the register, the highest ‘non-Tinkler vote’ against any of the resolutions put forward – whether they were director re-elections or executive remuneration – was just over 3 per cent.

Even Farallon Capital, one of Tinkler’s main backers, sided with Whitehaven over the aspiring chairman.

Tinkler has cast some aspersions on the Whitehaven board over the last few days and it’s never a good situation when a company’s board and its largest shareholder are singing from such radically different song sheets. This simply can’t go on.

With such a strong show of force against Tinkler, it’ll take a mighty effort to muscle his way onto the board.

Selling down his stake is almost certainly not an option for him as most of his net worth is tied up in Whitehaven and it has lost significant ground since merging with Tinkler’s Aston Resources.

What shareholders like are takeover premiums. Given the fact that Whitehaven’s share price is sitting at $3 a share as opposed to $6 in April, there’s definitely an opening for another tilt.

But the question is how much financing Tinkler can summon. While there has been some short-selling action, motivated by the theory that the Tinkler empire is cash-strapped and could be forced into a margin call, the main thing that’s hurt Whitehaven shares is the price of coal.

While Tinkler wasn’t that far off putting together a $5.3 billion bid earlier this year, it’s likely that his co-bidders wouldn’t be as keen to throw in cash with coal prices well off their highs.

The shareholders wholeheartedly endorsed Whitehaven resolutions yesterday. But in another sense, nothing was resolved.

Ten Network

When news broke yesterday that big parcels of Ten Network shares were hitting the market, the question on the lips of M&A watchers, including this one, was which billionaire was selling?

Sadly for the headline writers, it turned out to be Perpetual. Well, at least the fund manager is strongly suspected to be the one behind the two parcels of shares that totalling almost 10 per cent of the stock. Bell Potter is understood to be the broker behind the sale.

This is a remarkable unwinding of Perpetual’s position, which sat around 15 per cent not long ago. But it should be said we’re still waiting for official confirmation.

While speculators were left disappointed by the fact that none of Ten chairman Lachlan Murdoch, gaming billionaire James Packer, mining magnate Gina Rinehart or WIN Television’s Bruce Gordon were selling stock yesterday, there’s another enticing question to be answered. Who’s buying?

For that answer, we’ll have to wait and see.

Drillsearch, Acer Energy

That’s it for Senex Energy. If it was thinking about firing a shot, Drillsearch made sure it was wearing a bulletproof vest.

Oil and gas producer Drillsearch has secured majority ownership of Bowen Basin after securing a number of additional acceptances on top of Singapore Republic Investment’s near 40 per cent stake. One of the acceptances came from Senex.

"We are pleased that so many Acer shareholders, including Senex, have taken the opportunity to accept the offer and we encourage remaining Acer shareholders to do the same,” said Drillsearch chairman Jim McKerlie in a statement yesterday.

Drillsearch now has 51.98 per cent of Acer. It will now get on with appointing a majority of directors to the board.

Private Equity Yearbook 2012

Private equity funds in Australia haven’t been hard done by when it comes to fundraising, but they have had some difficulty putting the cash to good use.

The Australian Private Equity and Venture Capital Association has released their 2012 Yearbook report and the results show that Australian private equity has a good story to sell to its own investors, but not those in the companies they target.

Seventeen funds managed to raise just over $3 billion in 2011-12, which is up a staggering 54 per cent from the previous year. However, private equity investments fell 24 per cent to just under $3 billion.

While the closeness of those two numbers might look deliberate, private equity funds already had quite a bit of cash sitting on their books at the beginning of 2012. They’ve been looking to spend.

"Reflecting the relatively muted deal climate, only 28 private equity managers completed new deals in FY2012: the lowest number of participants in ten years,” the report said.

Australian Retail Bonds

Yesterday, the Senate approved some long-awaited legislation that will usher in trading in Commonwealth bonds, which will be expected to begin trading on the Australian Securities Exchange.

Business Spectator’s Stephen Bartholomeusz explains how this has been on the table for two years, with Treasurer Wayne Swan promising back in 2010 to make it happen.

This columnist has absolutely nothing to add to conversation after Bartholomeusz’s piece. It’s a cracker piece, just read it.

Wrapping up

Corporate Agriculture Australia managing director Gordon Verrall believes that the interest shown in GrainCorp could prompt foreign investors to size up grain handling co-operative CBH Group.

According to The Australian, Verrall also believes that CBH could better the $2.7 billion offer put to GrainCorp by a factor of 2.5, thanks to its storage capacity, infrastructure and processing network.

While we’re talking agriculture, Potash Corporation of Saskatchewan – which makes the key ingredients for fertiliser – is pushing the Israeli government to grant it permission to take Israel Chemicals, even appealing directly to Prime Minister Benjamin Netanyahu.

PotashCorp is trying to make the case that taking over Israel Chemical does not run against Israel’s national interest, but in line with it. Some might remember that BHP Billiton made that same argument to the Canadian government, where PotashCorp calls home.

Meanwhile, Becton Property Group has caught $30 million of credit from ANZ Bank via a refinancing of its debt facilities for its retirement joint venture Retirement Alliance. The company’s new debt facility is now worth $77.5 million.

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