BREAKFAST DEALS: Another Billabong set

Gordon Merchant's mea culpa over the missed sale of Billabong might not be enough to protect his directorship, while Gina Rinehart talks tough in her bid for Fairfax board representation.

Billabong International has effectively opened the floodgates to suitors after a change of heart from founder Gordon Merchant. What price could they now possibly hope for? Meanwhile, DuluxGroup has thrown down a threat to Alesco Corporation in the hope of ending the stalemate between them. Elsewhere, Perpetual will sell its mortgage processing business, but has chief Chris Lloyd done enough to reassure the shareholder base? And for anyone watching last night’s Four Corners episode, mining billionaire Gina Rinehart told producers, in a written response, that she might have to sell out of Fairfax Media if she doesn’t get what she wants.

Billabong International

Billabong International founder Gordon Merchant will now welcome another takeover bid in the knowledge that it’ll be substantially less than the $3.30 he flatly rejected in February.

Speaking to The Australian Financial Review from his beachhouse in South Africa, Merchant said he felt bad about the way things turned out.

"I thought it was the right decision at the time . . . No one has lost more money than I have,” he told the newspaper.

Fairfax newspapers believe that at least two industry operators and one private equity firm are looking at taking a strategic holding or launching a full takeover bid. One would expect TPG Capital would be one of them, given that they saw value at $3.30.

While Merchant wouldn’t be drawn on a price he would accept, the surf industry legend conceded that it would be less than the $4 minimum he set when takeover activity flared up earlier this year.

Billabong finished yesterday’s session at 96 cents, after the company was handing out stock at $1.02 a share as part of its $225 million capital raising. The last traded price before the raising was $1.83.

The question is whether Merchant can continue to serve as a director of Billabong, having effectively conceded that his instrumental role in setting a $4 minimum on a stock that’s worth 96 cents just a few months later was a mistake.

The man himself told the AFR that he made the initial decision as a "shareholder, not as a director”.

Merchant only holds about 15 per cent of the register, but holds enormous sway over the company he founded. However, his inability to take up his full entitlements, from a capital raising that was decided upon at a board meeting he didn’t attend, has enraged some market participants.

But it was an inability to raise the funds, not a lack of willingness, according to Merchant. The director told the AFR that it was difficult to generate $30 million to take up as much as 85 per cent of his entitlements. Presumably, if he had more time, he would have found the extra funds.

The bid from TPG earlier this year was opportunistic, no doubt about it. It seems unlikely that anyone had much of an idea of just how bad the situation was at Billabong until it was too late, for everyone.

Expect previously touted suitors to reappear, along with a handful of other opportunists.

DuluxGroup, Alesco Corporation

The stalemate between paints company DuluxGroup and garage door maker Alesco Corporation shows only tentative signs of ending.

Dulux tried yet again to muscle its target yesterday with a 33-page response to Alesco’s target statement, labelling it ''misconceived and deficient”.

Further to that, Dulux chief executive Patrick Houlihan tried to strongarm Alesco by saying the 21 per cent stake his company has accumulated in the target is something it could live with.

"We could hold 19.96, with negligible holding costs, and we would be happy to do this rather than overpay for Alesco," Houlihan said in a statement.

Dulux has actually added to this stake – marginally – brining it to 20.98 per cent of Alesco. It is quite likely that if Alesco doesn’t give in to Dulux that the paints company will hold its $39.5 million stake.

Because once Dulux calls off the bid, the target’s share price will slump, leaving the now former suitor with a heavy set of losses.

Perpetual

The big news yesterday, as evidenced by the sheer scale of copy devoted to it, was the new strategic plan at fund manager Perpetual, laid down by chief executive Geoff Lloyd.

There is one likely transaction from yesterday’s announcement that should be resolved shortly, and one potential deal that would take a lot longer to play out.

The short-term deal is the sale of Perpetual’s mortgage processing business, thought to be valued somewhere in the vicinity of $50 million.

As The Australian points out this morning, there aren’t likely to be many suitors for the business, with columnist Tim Boreham suggesting SAI Global as one of the more likely candidates.

The potential, long-term deal is a takeover of Perpetual. The fund manager has been the subject of ongoing speculation that private equity will sweep in and reform the company in a quicker fashion than management should have done over the last 18 months – and shareholders would be rewarded for the privilege.

Private equity could still sweep in if equity markets punish Perpetual further. But for the moment, the company at least has a strategic plan to show to shareholders if an opportunistic suitor throws up some cash and suggests, not in the same words mind you, "Guys, they’ve got nothin’”.

Seven Group Holdings, Consolidated Media Holdings

As has been previously flagged by Breakfast Deals, the two problems facing media mogul Kerry Stokes when it comes to deciding on whether to launch a rival bid for Consolidated Media Holdings are debt and regulation.

In separate media reports this morning, analysts and competition experts have both expressed their views on the issue. The broad conclusions are that Seven’s debt is still a problem – a conclusion Seven reportedly disputes privately – while there’s a mixed perspective on competition.

Those who don’t have a problem with a Seven deal point to the Foxtel-Austar United Communications $2 billion tie-up as evidence that the Australian Competition and Consumer Commission doesn’t have a problem with pay-TV consolidation.

Sceptics argue that cross-media ownership is a different and tricky issue. It should also be said that the consumer watchdog slapped a few conditions on the Foxtel-Austar merger.

Fairfax Media, Gina Rinehart

Unlike DuluxGroup, mining giant Gina Rinehart has the wealth to incur a significant loss on her plays for control of a company.

According to ABC’s Four Corners program, Rinehart wrote to producers claiming that her company Hancock Prospecting would sell its 19 per cent stake in Fairfax Media "unless director positions are offered without unsuitable conditions”.

"HPPL may hence sell its interest, and may consider repurchasing at some other time,” the statement went on to say.

The comments were made to the program about a week ago, before it went to air and before Rinehart had increased her stake to 19 per cent.

It’s interesting to think about how strong a threat that is to the media company.

On the one hand the market has all but ruled out a takeover proposal from Rinehart, which means there’s no takeover premium from her presence on the register.

On the other hand, she might be an ally to another suitor if they were of the mind that the company could be divided up. Rinehart selling out would make such a proposal harder to get up.

Fortescue Metals Group, Andrew Forrest

Iron ore kingpin Andrew "Twiggy” Forrest is suspect number one in relation to the share raid on Fortescue Metals Group by an existing shareholder last night.

After the market closed, media reports indicate that that an offer for almost 2 per cent of the register was thrown up at $4.90 a share and all eyes point to the FMG founder and chairman. Morgan Stanley is said to have done the honours.

Forrest currently owns 31 per cent of Australia’s third force in iron ore.

If it weren’t Forrest, the most enticing prospect would be Canada’s Teck Resources.

Teck is widely believe to be the party that snapped up almost 3 per cent of Fortescue shares in February, though this has never been officially confirmed.

As "almost 2 per cent” plus "almost 3 per cent” would still not bring Teck to the 5 per cent threshold where it’s obliged to make itself known to the market as a substantial shareholder, the intrigue would continue.

Sino Gas & Energy Holdings, MIE Holdings

Hong Kong’s MIE Holdings looks set to pick up a 51 per cent majority stake in a unit of ASX-listed China-focussed coal seam gas explorer Sino Gas & Energy Holdings. SGE went into a trading halt yesterday.

According to media reports, SGE could reveal as soon as today the details of the farm-in agreement, but how about we see what they’ve managed to ascertain.

The deal apparently involves MIE injecting $US10 million into Sino Gas & Energy, with another $US90 million that will go into exploration work at the company’s Sanjiaobei and Linxing projects. Project partners include China National Petroleum and PetroChina.

Details will probably follow sometime today, if not tomorrow, on a deal that was flagged to the market earlier this month.

Wrap up

Corporate raider Mariner Corporation has thrown a $14 million offer at listed fund manager Austock, at 10.5 cents a share.

That represents a skinny 5 per cent premium for the struggling company, but its shares rallied 20 per cent to 12 cents, reflecting a renewed sense of optimism.

Meanwhile in mining, Nathan Tinkler watchers should tentatively pencil in next week as a time to expect more news on his as-yet unrealised proposal to take Whitehaven private. The Australian Financial Review nominates the time, without many more firm details. News Limited understands that Investec has won the mandate to conduct a strategic review at Kagara, the zinc and copper miner that fell into administration a few months ago.

Elsewhere, Challenger Infrastructure Fund, advised by Rothschild, has agreed to a binding sale agreement with Brookfield Infrastructure Partners for UK utility provider Inexus, with a possible price of $55 million.

At long last, Echo Entertainment will be able to reduce debt with the proceeds of its $454 million capital raising after securing an agreement to change the terms of its funding facilities. Echo will now redeem its US private placement notes.

And finally, Thiess Waste Management is reportedly being fought over by three players – SITA, Transpacific Industries and Germany’s Remondis.

The Australian Financial Review believes that the suitors are working on their final offers before the deadline at the end of this week.

Leighton Holdings is the parent company that is ultimately hoping for $300 million and may have to walk away from the process if, as now anticipated, bids fail to meet expectations.

Related Articles