BREAKFAST DEALS: Billabong buzz

Billabong adjusts following a takeover bid, while Spotless awaits due diligence scrutiny from PEP.

Billabong International shares have lost almost four-fifths of their value over the last 12 months and the company's board wants a big slice of that back. However, the apt timing of a takeover offer from private equity with a healthy premium will have some investors hoping for a quick way out. Billabong updated the market today on its strategic review, announcing a swathe of cost cutting measures and the partial sale of one of its brands – which it said broke a condition of the bid. Meanwhile, PEP is set to begin due diligence on Spotless, and a strange ruling from the Takeovers Panel has helped produce a massive increase in a bid for engineering group Ludowici that it might later undo. Elsewhere, Whitehaven Coal expects half a billion in synergies with Aston Resources, Sundance Resources' Chinese suitor is hanging on through tough negotiations in Africa and APN News & Media is reportedly teaming up with private equity in the great outdoors.

Billabong International

The executives of Billabong International have announced a significant program of change for the company in its strategic review update. Amongst other measures, the company announced the partial sale of its Nixon brand in a JV with Trilantic Capital Partners.

Billabong confirmed the approach earlier this week by private equity giant TPG Capital in today's results and updates to the market, saying the company received "a non-binding, indicative proposal from TPG Capital to
acquire all of the shares in the company for $A3.00 cash per share".

However, the group said that proposal was not certain, and subject to due diligence, finance and conditional on other factors including "Billabong not selling down its ownership interest in any of its brands". On the partial sale of the Nixon brand, the company's board explained that they were concerned about breaching bank covenants unless it made some transaction to address balance sheet issues.

The review was announced in December after the catastrophic earnings downgrade and speculation about the company’s future had centred on two broad categories: capitals raisings and a takeover. It’s understood that Billabong founder Gordon Merchant, who holds 45 per cent of the company, isn’t particularly interested in a takeover because the stock is so beaten down.

To some extent that’s fair. This time last year the stock was above $8, this morning it was down 78 per cent to $1.79. While the reported proposal from TPG of something north of $3 would constitute a good premium, it’d be hard for anyone to swallow given where the stock was not long ago. Shares in the company did soar, however, upon resumption of trading this morning – roughly doubling to $2.60 by 1100 AEDT, reflecting the changed situation in light of the announcements.

Spotless Group

Speaking of which, things have gone a little quiet at Spotless Group after the company finally relented to investor demands and decided to give suitor Pacific Equity Partners the key to the data room. At the moment, PEP is looking at an offer of $2.68 a share, which falls short of the board’s $2.80 target from where it will deliver unanimous recommendation to shareholders. Quite simply, they think the company’s strategic turnaround strategy can’t be completely found in $2.68.

However, The Australian Financial Review understands that PEP will start conducting due diligence as soon as Monday, which will give the Spotless advisers at Goldman Sachs an opportunity to talk the company up to its private equity suitor.

Ludowici, FLSmidth, Weir Group

Ludowici has fallen on the right side of a bizarre ruling from the Takeovers Panel that has allowed a significantly superior bid for the company. The engineering group has received a bid of $10 a share from Danish company FLSmidth, far higher than the $7.20 it originally offered. The new offer, which is just shy of $300 million, is much higher than a rival proposal put forward by UK-listed Weir Group, but comes amid strange circumstances that could render the $10 offer meaningless.

Just to recap, FLSmidth threw up a $7.20 cash bid and subsequent unqualified comments from chief executive Jorgen Huno Rasmussen indicated that it was final. UK-listed Weir Group swooped in with an offer of $7.92, reported FLSmidth to the Takeovers Panel, and with that the Danish were looking stranded.

The Takeovers Panel has provided an interesting answer to the question of whether FLDmidth can increase its bid for the engineering group when it has potentially violated truth in takeovers provisions. Their answer is "Yes, but then maybe not”. It’s an interim ruling, but the panel has allowed FLSmidth to make a bid while it decides whether it will ultimately block a higher offer.

The question begs, if Weir Group tops this new offer and it’s ultimately rendered ineligible, are they allowed to walk away from the new proposal? Would shareholders be willing to accept $7.92 when they know the company is worth $10 to somebody?

Stockland, Centro

With Centro now through the tumultuous period that led to its rebirth as one listed trust and with a couple of months of trading under its belt, attention is inevitably turning to its M&A attributes. Speculation has centred largely on Stockland, as some of the company’s assets would fit nicely in the Stockland portfolio.

Indeed managing director Matthew Quinn used very similar language when speaking to Business Spectator in today’s KGB Interview. However, Quinn plays a straight bat when asked directly if his company had thought about making a run at Centro. "There are a couple of centres that Centro own that would fit with our strategy, but as far as I’m aware they’re not for sale,” he said.

Whitehaven Coal, Aston Resources

For a company that’s on the brink of sealing a $5.1 billion merger of equals with Aston Resources, Whitehaven Coal has just posted a relatively modest profit of $20 million. It just goes to show the growth potential of the two companies and just how sought after coal is. But investors wondering whether tying up the two groups is a good idea have been given a bit of encouraging news from Whitehaven management.

Estimates for the synergies have ranged between about $250 million and $500 million. While managing director Tony Haggarty doesn’t quite agree with the top figure, he expects synergies "of that order”. The other side of the equation is whether the compensation set aside for Boardwalk Resources – the private company of Nathan Tinkler, who owns 38 per cent of Aston – is excessive.

Sundance Resources, Sichuan Hanlong Mining

Sundance Resources has been dreaming of getting its Mbalam iron ore project that straddles the border between the Republic of Congo and Cameroon for some time. So has China’s Sichuan Hanlong Mining. The Chinese company has been forced to extend its $1.4 billion offer, conditional on Sundance winning necessary approvals for the project from the two governments, until April 27.

Previously the 50 cents a share offer was due to come to an end on February 29. Hanlong must be suitably convinced that some progress is being made in the negotiations in Congo and Cameroon, or it’s just mighty convinced that Mbalam is worth holding on for. Whatever the case, the stock remains well below the offer price, at 41.5 cents, as the market remains sceptical that this deal will ever get up.

APN News & Media, Quadrant Private Equity

APN News & Media flagged to the market in November last year that its outdoor advertising division was not up for sale, in actual fact it was exploring ways to expand it with a partnership. That exploration appears to have narrowed. According to The Australian Financial Review, APN is in discussions with Quadrant Private Equity to form a $200 million outdoor advertising joint venture. The newspaper says both sides are confident that a deal can be reached, which could trigger broader consolidation across the sector.

Wrapping up

Kuala Lumpur's CIMB is purchasing the Australian equity operations of Royal Bank of Scotland. It’s been reported that the deal will be finalised on Monday. Stephen Williams will no longer lead the Australian arm, with Andrew Chick, debt capital markets and infrastructure manager, taking the wheel.

Pallet maker Brambles says it wants to get the sale of its US document management business Recall resolved by the end of March. When last we heard Onex, Apollo Global Management and Thomas H Lee Partners had confirmed their prices, with The Carlyle Group apparently exiting the process.

And finally, Brazilian mining giant Vale is officially offloading its NSW coal asset, the Integra mine in the Hunter Valley. Merrill Lynch has been appointed to find a new home for the asset, although because the plant is plagued by issues it’s not expected to get a great price.

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