BREAKFAST DEALS: Aviation fuel
Etihad's buy-up of Virgin Australia shares looks set to change the aviation landscape, and maybe legislation, while Coca-Cola Amatil plans to fall off the wagon.
Virgin Airways, Etihad, Qantas Airways
Etihad Airways chief executive James Hogan has made it clear to everyone, including the Australian Foreign Investment Review Board, that his airline intends to increase its stake in Virgin Australia to "a minimum” of 10 per cent.
This sets the scene for an interesting debate about the merits of the Qantas Sales Act in light of yesterday’s news that its international arm is more of a burden than its investors had anticipated.
Virgin Australia chief executive John Borghetti, who engineered the unlisted international spin-off that’s allowing more overseas investors onto the register, received praise from Etihad for his management of the airline. The investment will strengthen the growing level of cooperation between the two carriers.
Etihad decided to go public with the news that it has purchased 3.96 per cent of Virgin on the open market over the last few weeks, for $US36.5 million. Recent reports had indicated that someone was moving on Virgin stock, but Etihad’s presence was partially hidden by Air New Zealand, which converted some equity derivatives to boost its stake to 19.99 per cent.
Etihad didn’t have to tell the market of its purchases just yet – substantial shareholder notices kick in at 5 per cent. The declaration by Hogan that the company is looking for 10 per cent and his comments to The Australian that a board seat would be sought at the "appropriate point in time” will also serve as a clear message to Air NZ of Etihad’s intentions.
Given the obvious struggles that Qantas Airways is facing – and the reality that Virgin’s Etihad deal could strengthen its hand against our national carrier – some believe the evolving make-up of the Virgin register will strengthen Alan Joyce’s case for Canberra to loosen up the foreign ownership restrictions that Qantas deals with.
Middle-eastern airline Emirates, an Etihad rival, has already indicated a willingness to do a code-sharing deal with Qantas, but an equity investment appears off-limits for the moment. Changes to the legislation however could seriously alter that.
The share price rout yesterday brought Qantas stock to all-time lows, when credit rating agency Moody’s had already flagged the Australian carrier for a potential capital raising.
Some have suggested to The Australian Financial Review that Qantas should consider asset sales – the successful Qantas Frequent Flyer and Jetstar units were mentioned – to ease capital expenditure pressures.
Joyce maintains that Qantas doesn’t need to raise capital, but such a move would make far more sense that selling off the profitable units.
As explained by Business Spectator’s Stephen Bartholomeusz, the threats Qantas faces – especially for Qantas International – are "particular and particularly complex”. Why would they get rid of the units that aren’t haemorrhaging money?
It’s a particularly curious suggestion now, given that Brambles has just pulled the sale of its successful US document management business Recall because buyers can’t hit reasonable valuations. Now is the time to hold good businesses and do what you can with the rest.
Unfortunately, with Qantas International, Joyce’s hands are to a large extent tied.
Sundance Resources, China Sichuan Hanlong Mining
Sundance Resources has now shifted attention to China Sichuan Hanlong Mining, having done almost all it can to secure the future of the Mbalam iron ore project between the African nations of Cameroon and the Republic of Congo.
Hanlong is currently proposing a bid of $1.65 billion for Sundance, or 57 cents a share, provided that it secure necessary approvals for the $5 billion development to go ahead. Although, when we say currently, it should be remembered that the Sundance board unanimously agreed to this proposal eight months ago.
The Perth-based miner still has to nail down mining licences from the two countries but with these key term agreements signed, Sundance is confident.
Cameroon was considered the harder nut to crack and in order to win them over, Sundance has handed over another 5 per cent of the project, giving the government 15 per cent. In exchange, Mbalam will enjoy a minimum five-year tax holiday, port and rail infrastructure discounts and a host of other favourable terms.
Now the spotlight shifts to Hanlong. One of the clouds hanging over the deal – and the Sundance share price, which is still trading only just above 40 cents – is the ability of the Chinese company to secure capital.
Hanlong must bed down provisional approval from the National Development and Reform Commission in China by month’s end, as well as credit approval from the China Development Bank by the end of August.
Until then, there’s a handy profit available for confident speculators. But be warned, before the Hanlong deal broke, Sundance shares were touching 30 cents.
Coalworks, Macquarie Bank
Takeover target Coalworks has fired back at disgruntled shareholder Macquarie Bank in the lead up to the silver donut’s motion to spill the company’s board.
Chairman Wayne Mitchell sold the progress Coalworks has made over the last two years towards becoming an independent coal company. However, it’s a reality that the junior acknowledges is becoming less of a possibility given the $142 million takeover offer from Whitehaven.
"The Macquarie proposal will have the effect of destabilising Coalworks at a crucial time, and will significantly lessen the ability of Coalworks to extract a fair offer for all Coalworks shareholders from a potential purchaser of the company,” Mitchell said in a letter to shareholders.
Mitchell also hit back at suggestions from Macquarie that the company’s senior management has been overcompensated and defended the discounted placement to, and advisory appointment of, Hong Kong’s Noble Group.
The uncertainty couldn’t come at a worse time for Coalworks given that the Whitehaven offer, which they’ve urged shareholders to reject, comes while coal prices are sliding.
Questions have been asked about the price that China’s Yanzhou Coal paid for Gloucester Coal, which was approved yesterday by the target’s shareholders. Those same questions are being raised about Gina Rinehart’s Alpha Coal mine, although attention is centred firmly on the stoush with Environment Minister Tony Burke.
With coal price continuing to slide and a global downturn on the cards, Coalworks shareholders need to be damn certain the board has good reason to reject Whitehaven’s advances. Otherwise, some might want to take the profits while they can get them.
Telstra, TelstraClear, Vodafone New Zealand
Telstra Corporation might have been effectively blocked in advance from taking a higher stake in Foxtel and it’s number crunching on Nine Entertainment is probably destined to amount to nothing. But it’s not out of the M&A game by any stretch.
Telstra confirmed to the market that it’s in discussions with struggling Vodafone New Zealand about the possibility of selling its Trans-Tasman subsidiary TelstraClear. The telco said that Vodafone made the first move.
Valuations of up to $400 million have been thrown around for TelstraClear.
Telstra made it clear that the talks mightn’t result in a transaction, however the proceeds of this could then be channelled into the telco’s NBN footprint or a major acquisition that chief executive David Thodey is clearly open to.
Coca-Cola, SABMiller, Foster’s Group
Coca-Cola Amatil chief executive Terry Davis might be feeling the better for his company’s decision to get on the wagon for a couple of years.
CCA has outlined its plans to re-enter the Australian beer market after a forced sabbatical, thanks to the decision to sell its brewing joint venture to SABMiller as part of the London-based company’s pitch for Foster’s Group.
Documents lodged to the ASX indicate CCA’s belief that there’s potentially $1.2 billion a year in the Australia and Pacific region per year for regular beer, as well as an extra $200 million for premiums.
CCA intends to charge its glass again with new strategic partnerships and crafting an export program from its Fiji operations. That would be followed by a re-entry to the New Zealand market through international partnerships and finally a new life back in Australia.
The reason why CCA might be thankful to take a few years to consider its options is SABMiller is facing a prolonged struggle to turn Foster’s around.
Questions were already being asked of the brewing giant when the $12 billion deal was announced. Foster’s and Lion Nathan dominate the mature Australian beer market, with about 45 per cent apiece, and the sales of SABMiler’s target were already going backwards.
That trend has continued. Late last month, SABMiller revealed that volumes at Foster’s had slid 4 per cent compared to its overall average of a 3 per cent increase.
SABMiller has also kissed goodbye to a handful of brands in the wake of the Foster’s takeover and with that brand churn comes, in time, opportunity for CCA.
Echo Entertainment, Crown, James Packer
Billionaire James Packer has received two boosts for his pitch to unseat Echo Entertainment chairman John Story, which is widely thought to be part of a campaign to gain enough control of the company to serve his own ends without paying a premium.
According to The Australian Financial Review, NSW Premier Barry O’Farrell has expressed admiration for what Packer’s near-majority owned Crown has achieved.
It’s reassuring for Packer to get an endorsement from the head of the NSW government, given that he needs approval in NSW and Queensland to increase his stake in Echo beyond 10 per cent.
Meanwhile, analysts at Nomura have called for consolidation in the casino market to prevent strong competition from Asian operators taking too much of the Asia high-roller market.
Those are the customers that Packer wants to attract with his plans for the Barangaroo site in Sydney.
Andrew Forrests’ Fortescue Metals Group could be destined for another joint venture with BC Iron. The Australian Financial Review understands that BC is having a look at the 50 per cent stake in the Mindy Mindy iron ore deposit held by Consolidate Minerals.
Fortescue owns the other half of the site, which sits 100km away from its Pilbara rail line. If BC were to move, it would add to the existing relationship the pair share through the Nullagine mine.
Pallet maker Brambles received a largely warm reception from analysts for deciding against selling the US document management business Recall due to poor valuations and instead raising capital from the market.
By about lunchtime today, Brambles will have an idea of what institutional investors think of the idea, with UBS and Bank of America-Merrill Lynch closing the bookbuild around lunchtime.
And finally, Goodman Group has joined forced with Malaysia’s largest pension fund, Employees Provident Fund, to build an Australian focused fund that could top $1 billion.
Initially, the $400 million fund will snap up six logistics sites from Goodman and the unlisted Goodman Industrial Australian Fund. Baker & Mackenzie acted as trustee of the relationship investment vehicle, while Freehills also separately represented Goodman.