BREAKFAST DEALS: Arrium duel

Steelmakers Australia faces a fight to acquire Arrium, while the latest numbers show domestic M&A is struggling.

Steelmakers Australia has a tough battle ahead if it’s to win over Australia’s Arrium, even if it does try to sell the idea that the company faces some stiff headwinds and internal challenges. The latest numbers from Dealogic show that Australian M&A is struggling big time, but at least Macquarie Group has had a good few months.

Elsewhere, Australia’s oil and gas players are finding some deals, while ANZ’s Mike Smith won’t be drawn too far into speculation about Standard Chartered. And it’s a big day for Fortescue’s Andrew ‘Twiggy’ Forrest, a bad day for 2GB’s Alan Jones and a good day for stock-picking legend John Sevior.

Arrium Limited, Noble Group, POSCO

The Asian consortium pursuing Arrium Limited, formerly known as OneSteel, will have to fork out a bigger premium or buckle up for a long battle to snare the steelmaker.

Steelmakers Australia, a consortium led by Singapore-listed trading house Noble Group and South Korea’s POSCO, could not even get Arrium to engage with its $1 billion takeover at 75 cents a share, despite the initially compelling 38 per cent premium.

That might have something to do with the staunch person occupying the target’s chair, M&A legend Peter Smedley. The PacMan, as he’s sometimes known, went through a five-and-a-half month battle with private equity player Pacific Equity Partners while he was chairman of Spotless Group, one of two private equity approaches he faced, before siding with the bidder.

But the Arrium board’s opposition to this bid should not be inappropriately characterised as a reflection of Smedley’s defensive game. That 38 per cent premium is misleading.

Arrium’s share price was trading at 75 cents little more than a month ago. Since August 21, the stock has lost 40 per cent of its value.

The "unsolicited” deal that was lodged on Friday after the market close is unquestionably an opportunistic play, which is conditional on due diligence, regulatory approval and support from the Arrium board. They were right to dismiss it.

Steelmakers Australia says it "remains interested” in working with the Arrium board, and the statement from the target implies this probably isn’t the end.

Arrium said the bidders haven’t even got financing in place, which speaks to the suggestion that Steelmakers Australia moved quickly to try to take advantage of Arrium’s sudden share price weakness.

Given the offer is just an 8 per cent premium to the company’s three-month volume weighted share price, the Arrium rejection is well justified. The target is maintaining UBS as its financial adviser and Allens Linklaters as its legal adviser for the battle with Steelmakers Australia, which also includes National Pension Service of Korea, Korea Investment Corporation and Korea Finance Corporation.

Business Spectator’s Cliona O’Dowd wrote yesterday that the bidders have some good strategic reasons to go for Arrium.

"Posco is sure to be eyeing up Arrium’s steel distribution network in Australia, while Noble will likely have a keen interest in the group’s iron ore business. For Posco, Arrium’s Whyalla plant in South Australia would give it an advantage as the steelmaker looks to bulk up its Australian assets.”

So how do you sell a lowball bid, timed during a recent share price retreat, that holds significant strategic benefits for the bidders? By telling the target’s register that they could be worse off on their own.

"Steelmakers Australia can make Arrium a more competitive steel producer by improving production processes, operating efficiency and investment in technology to lower the cost of production,” said Steelmakers Australia director and Noble executive director William Randall.

"By using the proven expertise of POSCO in steelmaking supported by Noble's global supply-chain management skills, we can make the Arrium business more efficient and globally competitive,” Randall said.

The inference here is that Arrium faces some long-term strategic challenges and balance sheet stress, why not jump on board with the consortium and sell your way out of those problems?

Dealogic

The Australian M&A market can only hope that the lead up to Christmas, traditionally when things quieten down, will deliver a few surprises. The first nine months of the year were shocking.

According to the latest numbers from Dealogic, deals involving Australian companies and targets fell 48 per cent to $59 billion from $113 billion for the nine months to September. It’s the largest recorded fall for Australia over that period, according to the data provider.

It left Australia sitting in seventh position on the global tables, behind the US in first, China in second, the UK in third and Switzerland in sixth.

Perhaps the only positive emerging from the figure was reserved for Macquarie Group.

The investment bank shot to the top of Australia’s M&A volume rankings, after finishing eighth in the last set of results.

Macquarie has got its hands on a few headliner deals lately, including the Future Fund’s move on Australian Infrastructure Fund and TPG Capital’s reworked proposal with Billabong International.

Australian Oil & Gas, Santos

Interestingly, the oil and gas sector led Dealogic’s global M&A volume table and the Australian sector is showing a few signs of life.

The rather appropriately titled Northern Territory-focused explorer Australian Oil & Gas is understood by The Australian Financial Review to be looking at a potential listing on the ASX.

The newspaper reports that Patersons Securities and RBS Morgans have been hired to look at the best options for a listing that could value the company at $500 million.

A domestic cornerstone investor is apparently being looked for.

Meanwhile, industry major Santos is reportedly set to announce a $150 million joint venture with Central Petroleum, led by Richard Cottee.

The Australian reports that the deal will give Santos up to 70 per cent of Central’s acreage in the NT.

ANZ Banking Group, Standard Chartered

ANZ Banking Group chief executive Mike Smith played a pretty straight bat to a question put to him about a potential merger with Standard Chartered.

"Acquisitions are the hardest thing to get right,” Smith told The Australian Financial Review.

"The execution risk is high and you’ve got to make sure you’ve got a sufficient buffer in your price to really achieve what you’re trying to create.

"Because there will always be surprises, I can guarantee it. Invariably they’re on the bloody negative side.”

ANZ is famously looking to generate 25-30 per cent of its profit from outside Australia and New Zealand by 2017. Asia is at the centre of that target.

Smith’s comments come on the back of a report by the Financial Times that Temasek, the Singapore investment fund, is thinking about offloading its £6 billion ($7.5 billion) stake in Standard Chartered.

The big fish could be vulnerable to share price weakness and might be open to deal. But Smith described the notion as "theoretical” and "far-fetched”.

"It’s an incredibly difficult thing to manoeuvre, because we’re a similar sized bank. The only way that would work is if everybody was comfortable to dance.”

Fortescue Metals Group

Iron ore miner Fortescue Metals Group has still suffered a downgrade from Standard & Poor’s despite the iron ore miner’s mood-changing $US4.5 billion refinancing that was done, in hindsight, just in the nick of time in more ways than one.

The US ratings agency downgraded its rating on Fortescue’s senior debt to B from BB-, because it remains concerned about the iron ore miner’s vulnerability to low prices.

The refinancing deal came amid a strong push from the market for a capital raising amid the slump on iron ore prices last month, something the short sellers took full advantage of.

But while the deal was portrayed as a stabiliser with short-selling pressure as the background, another way of illustrating it is a deal that stabilises the miner before a potentially disruptive leadership shift.

Today, Fortescue founder, chairman and 30 per cent Andrew Forrest will get his long-awaited answer from the High Court about allegations from the Australian Securities and Investment Commission (ASIC) that he breached continuous disclosure obligations in 2004 and 2005.

Backtrack just a few weeks and imagine if Fortescue had gone into this High Court decision without the refinancing agreement behind them.

It’d be a much more nervous session in the court.

Wrapping up

Rambunctious 2GB host Alan Jones is losing corporate sponsors for a comment concerning the Prime Minister’s late father that even appear to cross the loosened set of standards he appears to operate under.

Mercedes-Benz Australia, financial services firm Group Challenger and furniture company Freedom have all pulled their support for the embattled radio host, who suggested Julia Gillard’s father "died of shame” because his daughter lied to the Australian people.

Woolworths has also confirmed that it will bypass Jones’s segment.

Far from losing supporters, Australian stock picking superstar John Sevior is reportedly about to sign up the first client for his new business, Airlie Funds Management.

According to The Australian Financial Review, AustralianSuper is the first inline to tap Sevior’s mind after the legend in his first big thing post-Perpetual.

In resources, Sundance Resources has asked for an extension to its trading halt after telling the market that a letter from suitor China Sichuan Hanlong Mining confirming finance for its $1.4 billion bid had not been forthcoming.

Now, we’re told, that the magic date will fall somewhere in "mid-October”. If this deal does get done in the end, it probably won’t be until next year given the rapidly approaching holiday season when the corporate wheel slows.

Meanwhile, mining services has confirmed that it is in discussions with Morgan Stanley and Deutsche Bank, among others, about a potential refinancing deal. Grant Samuel and King & Wood Mallesons are advising.

Paints company DuluxGroup extended its $210 million takeover offer for Alesco Corporation, giving the target’s shareholders more time to accept its offer.

And finally, Etihad has broken ranks with partner Virgin Australia and thrown its support behind an alliance between Qantas Airways and Emirates.

Read into it what you want. It might be a practical response if Etihad thinks the deal will be waived through anyway, or an acknowledgement that it has a similar arrangement with Virgin, though not as deep.

Still, Qantas couldn’t help but oppose Etihad and Virgin when the pair were first talking to the Australian Competition and Consumer Commission.