BREAKFAST DEALS: Billabong storm

Billabong's hopes for private ownership look increasingly shaky, while Discovery Metals takes its time mulling a takeover offer.

The wave that Billabong International is hoping to ride all the way to private ownership is showing serious signs of dying before the shore. The surfwear retailer couldn’t deny that TPG Capital is thinking about doing a Bain Capital and walking away from the sales process. Meanwhile, Discovery Metals is being asked why it kept its own takeover approach under wraps, as Elders spills all the beans on Ruralco. Elsewhere, BHP Billiton has been linked to some Gulf of Mexico assets, Arrium is building its defence against its Asian consortium bidder, Qantas is doing the groundwork in Dubai and Woolworths has found the ire of the consumer watchdog.

Billabong International, TPG Capital

The perception that private equity suitor Bain Capital took one look at the Billabong International books and ran became a lot more believable following yesterday’s events.

Billabong should emerge from a trading halt this morning that it was forced to take following a report in The Australian Financial Review that claimed its only remaining suitor, TPG Capital, is considering pulling its $695 million approach.

The stock tanked 18 per cent in response to the article. Shares last changed hands at $1.08, well below the $1.45 price that TPG is discussing.

At least, that’s what Billabong tells us: "Billabong advises that TPG has confirmed that it has not withdrawn from the sale process. As part of its due diligence investigations, TPG and its advisers have expressed concerns in relation to some issues, however discussions in relation to those matters are continuing.”

Notice how Billabong couldn’t deny that TPG is thinking about pulling out. All it could do was acknowledge that some problems had been found.

The AFR reports that sources "close to the discussion” say the reliability of Billabong’s medium-term forecasts are a worry, along with the strength of the Billabong brand itself.

It’s that second point that’s particularly troubling. New chief executive Laura Inman has laid out a turnaround strategy that centres on consolidating Billabong’s myriad brands into the ones that actually sell.

If there are serious concerns that not even the headline brand is in good health, then it’s understandable why the forecast questions are alarming.

It’s expected that TPG will wrap up its three-month due diligence period, a generous amount of time to lend a suitor, towards the end of this month.

Discovery Metals, Cathay Fortune Corporation

Discovery Metals waited two weeks before confirming to the market that major shareholder Cathay Fortune Corporation had put together an $830 million takeover, and only after the latter went public.

Cathay Fortune owns 12.8 per cent of Discovery and has put a $1.70 a share bid for the rest of the company, in conjunction with 25 per cent co-bidder China Africa Development Fund.

Questions have already been asked of Discovery as to why it didn’t update the market when it received the bid.

That fact that the 17 per cent premium to the previous trading price is a bit skinny might suffice as an explanation. But the company said in yesterday’s statement that it’s still evaluating the indicative proposal and will "respond to the bidder as soon as that evaluation is further progressed”.

If the target isn’t dismissing the offer as simply too low, then it can’t convincingly use the ‘lowball’ defence for not releasing the details to the market.

The target is the Boseto Copper project in Botswana.

Cathay said in its proposal that it has secured approval from China’s National Development and Reform Commission and "upon consummation of a transaction would be funded by a loan from the China Development Bank”.

Readers of this column will urge Discovery to demand some documentation right away on that second point.

The China Development Bank has proved to be a nasty sticking point with the China Sichuan Hanlong Mining bid for Sundance Resources. Hanlong apparently has approval of a kind from the CDB, maybe, coming, we think, possibly and/or probably?

Citigroup Global Markets and King & Wood Mallesons are advising Cathay, while UBS and GRT Lawyers are aiding Discovery.

Ruralco, Elders

It’s safe to assume that relations between potential merger partners Ruralco and Elders have soured, quickly.

You can tell by the extraordinary action by the latter to release confidential letters between the chairmen of both companies, to clarify who said what when the idea of a $500 million merger was being played with last month.

If you don’t believe it, Breakfast Deals highly recommends you read the documents listed on Elder’s ASX page, where the response from Elders chairman John Ballard to Ruralco chairman Richard England begins with, "Thank you for your confidential letter…”

The main thrust of Ballard’s response is that Elders would prefer to continue with its restructure plans.

"However, if your timeframe is such that you want to explore the possibility of a transaction while we are working on our current initiatives, you would need to provide more information on what you have in mind before we could give it any meaningful consideration,” said Ballard.

BHP Billiton, Petroleo Brasileiro SA

Mining giant BHP Billiton has been named by the Wall Street Journal as one of a handful of players interested in acquiring a "multibillion-dollar stake” in Petroleo Brasileiro SA’s oil fields in the Gulf of Mexico.

The Brazilian state-controlled company, also known as Petrobras, values the fields at around $US8 billion ($7.8 billion) and has sought out Morgan Stanley to find potential buyers.

The report doesn’t name the other parties that BHP is going up against, but it does say that Petrobras is looking to maintain majority ownership.

Given the shift in BHP’s strategy away from it Port Hedland iron ore expansion and Olympic Dam, along with the criticisms of chairman Jacques Nasser on the government’s mining tax and carbon tax, it’s worth considering how this admittedly unconfirmed news fits into the mining giant’s shifting mindset.

It’s not into iron ore, the Australia’s darling commodity of recent history. It’s not in Australia, where mining wages are really starting to make some projects look sketchy when combined with a commodity price plunge. It is, however, in energy – US energy to be precise.

BHP already has a sizable presence in the Gulf and has built a substantial shale gas business courtesy of its acquisition of Petrohawk.

BHP’s dabble into shale gas was poorly timed and chief executive Marius Kloppers has copped a lot of flack for it.

But as Business Spectator’s Stephen Bartholomeusz wisely pointed out in September, the tumble in iron ore prices is making the miner’s decision to diversify away from the steel ingredient all the more convincing.

Arrium, Steelmakers Australia

Arrium has taken up the fight to suitor Steelmakers Australia over the main battleground of its $1 billion takeover offer, the iron ore business.

Yesterday, the company hosted some investors for a site tour and used the convenient timing to update its iron ore export guidance, which in turn was released to the market.

Arrium now expects iron ore exports of up to 9 million tonnes in the year to June 30 2013, compared to its previous forecast of 8 million tonnes.

The company also said that while it doesn’t have the capacity to use up all its 13 million tonne port, it has "reasonable aspirations” of one day doing just that.

The upgrades were probably in the pipeline anyway, but the timing is telling.

Earlier this week the Steelmakers Australian consortium, led by Singapore’s Noble Group and South Korea’s POSCO, put a bid of 75 cents a share on the table. The offer was promptly dismissed by the target’s board, and correctly so.

Qantas Airways, Emirates

Qantas Airways has withdrawn its application for interim approval of its merger with Middle Eastern carrier Emirates, apparently it doesn’t need the thing.

The flying kangaroo is now taking bookings that’ll send travellers to Europe via Dubai from March 31 next year, as opposed to its existing hub in Europe.

The reason Qantas has been able to proceed with this shift is because it’s not selling tickets at the same price as Emirates yet of coordinating its flight schedules. Essentially, no competitive ground has been ceded.

Australian Competition and Consumer Commission chairman Rod Sims said in a statement that the consumer watchdog is continuing to examine the 10-year alliance proposal that the airlines have put to it and the interim approval application withdrawal doesn’t affect that process one bit.

"The ACCC also notes that Qantas and Emirates believe that they are able to undertake a significant amount of preparatory work without the need for interim authorization,” said Sims.

The ACCC said it expects to deliver a draft determination in December, with a final decision to follow in March next year.

Woolworths

Speaking of the consumer watchdog, Rod Sims has put his foot down on the plan by Woolworths to purchase a small hardware chain as its plan saw off a slice of the lucrative hardware retail market, dominated by Wesfarmers’s Bunning brand.

Woolworths is trying to buy three stores owned by G Gay & Co in Ballarat, in conjunction with it’s partner in the hardware push, America’s Lowe’s chain.

"The ACCC is concerned about the removal of a key independent competitor from the market to the detriment of competition and local consumers.” Sims said.

Meanwhile we didn’t get the news that some expected yesterday that Woolworths will launch its capital raising plans for the $1.4 billion property spin-off, we might be sated this morning.

The Australian Financial Review reports that the supermarket giant will raise that up to $500 million, with the new units to generate a yield between 7.5 per cent and 9 per cent.

The report says Citigroup is the sole underwriter, while Commonwealth Bank of Australia and Morgan Stanley are co-managers of the retail part.

Wrapping up

The independent directors of Fisher and Paykel Appliances Holdings had told shareholders not to accept the $NZ869 million ($698.5 million) takeover offer from China’s Haier Group.

The independents said the $NZ1.20 a share proposal "does not adequately reflect their view of the value of FPA based on their confidence in the strategic direction of the company.”

Haier already has 20 per cent of the target.

Meanwhile, The Australian Financial Review believes that broker RBS has been in the market for Echo Entertainment stock, with bids coming in at $3.90 for an unnamed buyer. Everyone interested in this play has their eyes on Malaysian billionaire KT Lim and his Genting HK business.

And finally, shares in Mayne Pharma Group have been put in a trading halt after Fairfax outed the company’s plans for a capital raising.

A subsequent report indicates that sources say the capital raising and debt issue will be used to pick up a US-based pharmaceutical development company called Metrics Inc.

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