BREAKFAST DEALS: ASIC angst

Greg Medcraft wants to apply a 'put up or shut up' rule to takeovers, and you don't have to look far to see who he might be hinting at.

If the corporate regulator wants to keep billionaires from securing control of companies without a premium, what will the cost be to the broader market? In media, Ten Network won’t stand in the way of News Limited’s Consolidated Media Holdings bid, but what will it do with the EYE Corp proceeds? Elsewhere, Rio Tinto is reportedly backing out of a Portugal iron ore project, Brookfield Asset Management is a step closer to Thakral Holdings’ books and Mariner Corporation has called in the Takeovers Panel over its Austock bid.

Australian Securities and Investments Commission

The corporate regulator’s proposed changes to laws governing mergers and acquisitions raise two basic questions. Firstly, to what degree should a regulator protect a target board from a powerful suitor? Secondly, what are the consequences for the broader market, which is in a funk at the moment?

Australian Securities and Investments Commission chairman Greg Medcraft has suggested two key changes to prevent the kind of ‘creeping acquisitions’ or ‘acquisitions by stealth’ that many believe fly in the face of the "spirit” of the Corporations Act.

That "spirit” is takeovers should carry a premium.

Medcraft is proposing that the six-monthly limit on creeping limit be dropped from 3 per cent to 1 per cent of the target’s market cap. He’s also suggesting that a 30 per cent cap could be put in place, whereby a company has to bid to go above it – a ‘put up or shut up’ rule.

Such measures would have at least complicated and potentially prevented media billionaire Kerry Stokes from securing support of Seven Network back in the 1990s and more recently West Australian Newspapers.

The present day ‘examples’ that Medcraft appears to be alluding to must be the pitches by billionaires Gina Rinehart and James Packer for control of Fairfax Media and Echo Entertainment, respectively.

Both these figures have much less than the 20 per cent level – both for legal reasons – that Medcraft’s plan would have an influence at.

While the idea of a wealthy individual bludgeoning a company into submission to the detriment of retail shareholders is a concerning one, Medcraft might need to present a more compelling case that reform is genuinely needed.

Particularly, when you consider that the M&A industry is in a trough. Poor financing markets and cautious boards have left many investment bankers sitting on their hands. More regulation won’t make things easier.

Timing is not an argument against reform, but increasing the complexity for bidders will always offer a disincentive to bid in the first place.

Is it also relevant to the discussion that the two examples, Fairfax Media and Echo Entertainment, have battled falling revenues and falling share prices and internal management problems respectively. Premiums aren’t so important when a company is in trouble.

Rinehart and Packer mightn’t want to pay a premium, but there’s nothing stopping an outsider from putting a bid in. Indeed Singapore’s Genting has made a splash on the Echo register and private equity firms must have taken a look at Fairfax with a split in mind.

Indeed it’s the responsibility of besieged boards to shop the company around if it fears shareholders will be left short-changed by a mischievous major shareholder. Defence advisers would have much less to do otherwise.

How much of that burden should be shared by the corporate regulator? Medcraft has started a worthy discussion about it and should be credited for at least that much.

Ten Network, ARL, News Limited, Consolidated Media Holdings

It’s been pointed out in The Australian this morning that Ten Network will be better able to jostle for the ARL television rights deal thanks to the upcoming announcement of the sale of EYE Corp, its outdoor advertising business.

It’s expected that Ten will unveil the deal in coming days, with the sale to Champ Private Equity’s oOh!media tipped to generate at least $100 million.

But as Business Spectator’s Stephen Bartholomeusz argued yesterday (League left trailing by TV's troubles), all the free-to-air players are weak at the moment – perhaps that’s Ten’s greatest boost.

Ten still doesn’t have the kind of muscle that the ARL is looking for and "is not expected to be a major player” in the deal, Bartholomeusz wrote yesterday. Meanwhile, Seven West Media shares are in the toilet as investors foresee a capital raising, and we all know about Nine Entertainment’s extensive problems with its private equity owner CVC Asia Pacific.

Meanwhile, The Australian also reports that Ten Network has decided against lodging objections to News Limited’s bid for Consolidated Media Holdings, but it may have some issue with Seven Group doing the same.

The newspaper – owned by News Limited, along with this publication – says Nine Entertainment was considering its options with the investigation by the Australian Competition and Consumer Commission (ACCC), but Ten has declined to raise a fuss.

Rio Tinto

Mining giant Rio Tinto appears to be undergoing a rationalisation of its projects like rival BHP Billiton – though not on the same scale – with a deal in Portugal apparently falling through.

According to Reuters, an iron ore project worth €1 billion ($1.2 billion) looks set to go ahead with the government confident of securing other parties, but Rio won’t be one of them.

"Rio Tinto is choosing to give up smaller projects and Moncorvo should be one of them,” a source told Reuters, adding that talks had not officially ended with the miner.

As commodity markets cool in the face of a slowdown in China and government debt problems in Europe and the US, big miners have had to scale back once ambitious expansion plans as cash flows begin to tighten.

BHP has most famously put its $US80 billion expansion plans under review, with one of its headliner projects, perhaps two, destined for delay.

Rio has escaped a bit of attention thanks to its fantastic iron ore assets, with the exception of its divestment/sale plans for Pacific Aluminium that were flagged late last year. So far, little has happened on this front.

Thakral Holdings, Brookfield Asset Management

At long last, Canadian heavyweight Brookfield Asset Management looks set to gain access to the book of Thakral Holdings.

According to The Australian Financial Review, Brookfield’s strategy is likely to win it the keys to the A-REIT’s data room "shortly”.

It’s been a long time coming. Brookfield secured leverage over Thakral back in December after snapping up the Thakral family’s debt holdings. Afterwards it appointed PPB Advisory as receivers and threw up a 70 cents a share takeover offer.

That was three months ago. Thakral has objected to the offer by pointing to the net tangible asset backing of its shares. It’s a strategy that has proved brilliantly useless for other players in the sector.

However, Brookfield’s obviously dominant position in any sale process does make for some reasonable objections. Now the newspaper reports that regulatory intervention will allow a more balanced sales process.

Advisors Macquarie Capital and Investec will now be able to better weed out rival bidders. But Brookfield is in the box seat.

Austock, Mariner Corporation

Corporate raider Mariner Corporation has called on the Takeovers Panel to intervene in its bid for embattled stockbroker Austock.

Mariner’s $14 million offer was rebuffed with feeling by Austock, accompanied by a list of objections including the claim that the suitor had failed to secure proper approvals from Canberra.

Austock then announced the $11 million sale of its property trusts business Folkestone; this has sent Mariner over the edge.

In a sternly worded statement to the market, Mariner said the Folkestone sale was "a blatant attempt” by the target to block its advances.

"A company cannot sell its principal business during a takeover bid,” the company said.

TRUenergy, CLP Holdings

Given that we were talking earlier about the health of the M&A industry amid threats of further regulation, it’s appropriate to touch base with the deal that many see as a potential adrenaline injection for the market – the float of TRUenergy.

The company’s Hong Kong parent is contemplating an IPO of 49 per cent of the business some time later this year. It would mark the biggest market float since QR National.

Rothschild is advising, while Deutsche Bank, Merrill Lynch and UBS have been installed as IPO managers.

However, moves by Queensland regulators to basically reduce the allowance for the wholesale cost of energy has got analysts at Merrill Lynch thinking.

According to The Australian, the Merrill analysts believe that, if replicated by NSW, the regulatory changes could dent TRUenergy’s profits by $60 million to $65 million.

Such a change would only come in 12 months time. The longer CLP waits, the more such a prospect will weigh on the potential float price.

Wrap up

Having spoken of Rinehart earlier, a Reuters report from early yesterday indicated that the financing for Hancock Prospecting’s Roy Hill iron ore mine could be delayed as potential lenders worry about possible cost blowouts.

Rinehart is racing against time to secure financing for the project, while battling her children in court and Fairfax in the press, before other major projects in Australian and Africa come online, cooling the iron ore price.

But Reuters reports that construction costs are also a reason for concern that’s preventing Rinehart from securing an estimated $7 billion from lenders.

Elsewhere, supermarket giant Woolworths has had a win in its bid for a greater slice of the Australian pubs market.

Woolies’ majority-owned Australian Leisure and Hospitality Group purchased 32 pubs from a deal orchestrated by Ray White Group.

But the Australian Competition and Consumer Commission (ACCC) objected to some of the units that included take-away liquor businesses.

Well, now ALHG has won approval to acquire The Billabong Hotel in Merrilands, Sydney, one the sites of concern.

Meanwhile, the head of Vision Eye Institute has played down takeover speculation after Primary Health Care increased its stake to almost 20 per cent, sending the share price up sharply.

"All I can say at this stage is they've invested, you'd assume they see value as an investor; if they've got any intention beyond … they haven't communicated that to us,” chief executive Geoff Thompson told Fairfax.

And finally, engineering and infrastructure player Downer EDI has picked up a contract with TEC Coal, a private operator, for its Queensland mine. The five-and-a-half year deal could be worth as much as $800 million if Downer plays its cards right.

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