BREAKFAST DEALS: Cushioning Fortescue

Speculation mounts over Fortescue's next move, while Fisher & Paykel has a tasty premium on the table.

More ideas are being floated about how Fortescue Metals Group can insulate itself from the iron ore price, but would founder Andrew Forrest get on board? Queensland’s coal royalty shock has got many thinking about the viability of projects, while the Chinese foreign investment debate is maturing. Speaking of which, Fisher & Paykel has a tasty premium on the table from China’s Haier, while the initial talks over Nine Entertainment have thrown out some confusing signals.

Fortescue Metals Group

Fortescue Metals Group shares lost most of Monday’s gains during yesterday’s session as speculation about a potential capital raising returned.

Media reports indicate that Bank of America Merrill Lynch has extended a search for fellow lenders for a $US1.5 billion syndication loan until the end of the month. Breakfast Deals encourages readers to take this news with caution, as some of the reporting on this syndication loan appears to have been inconsistent.

What’s undisputed is Fortescue needs cash, quick. Just how much and when will be determined by the iron ore price. The longer it stays down and the more tepidly it recovers, the more radical founder Andrew Forrest has to get.

Data provider Steel Index said that offer prices for China’s iron ore cargo imports jumped 6.7 per cent on Monday to $US95 a tonne. It’s the largest spot price rise since they started watching prices in April 2009.

But Fortescue needs the price to increase and remain higher so it can service its substantial debt burden. A capital raising is front and centre of the market’s mind.

Another idea that’s being kicked around is the possible sale of Fortescue’s rail infrastructure to a third party, under the condition that it be left open to third parties like Gina Rinehart’s Roy Hill deposit, Atlas Iron and Brockman Resources. It’s estimated that this would give Fortescue at least $2.5 billion in cash.

The problem is that Fortescue would lose some room on its margins, which are already under pressure, if a third party assumed ownership of the rail line.

It’d be sacrificing a long-term strategic advantage for short-term relief.

Nathan Tinkler, Whitehaven Coal

That same criticism is being levelled at Queensland Premier Campbell Newman and Treasurer Tim Nicholls after the first state budget from the pair increased royalties some coal production.

The argument goes that Queensland’s coal industry is staring at a leaner future between high input costs and lower sale prices; taxing production at a higher rate will put some proposed projects, and even some existing ones, at serious risk. The issue is explained in detail in this morning’s edition of The Distillery.

While we’re on coal, it’s worth revisiting the failed $5.3 billion proposal to privatise Whitehaven Coal by Nathan Tinkler in the wake of what appear to be more liquidity problems for the coal baron.

Mining contractor Sedgman is understood to be short $2 million in relation to work down for Tinkler’s company Hunter Ports.

The news comes amid legal disputes between Tinkler’s private companies Ocean Street Holdings and Buildev Group with Mirvac subsidiary Domaine Steel River over a $17 million property deal, which apparently hasn’t been settled. He’s also having trouble with his private horse racing business Patinack Farm.

The Australian’s M&A expert Bryan Frith goes so far as to suggest this morning that it’s becoming "increasingly arguable” that the proposal to privatise Whitehaven Coal should never have been announced.

"From the outset investors were sceptical of Tinkler's ability to pull the deal together and Whitehaven's share price traded at well below the proposed $5.20 offer price,” writes Frith. "By the time Tinkler confirmed there would be no offer, Whitehaven's share price had sunk to about $3.50 and is now down to about $3.”

Frith’s frustration primarily stems from trend of lobbing indicative non-binding proposals, which go against the spirit of takeover laws that encourage a deal to be announced when a deal is actually on the cards.

Breakfast Deals understands Frith’s frustration with this practice. But it’s worth considering what kind of M&A regulatory environment we would have if such proposals were legislated against, or at least more actively discouraged.

Tinkler is a closely watched dealmaker; the market has been fascinated with the now apparently embattled former billionaire.

If Whitehaven had waited, the same string of reporting would have ensued except shareholders would not have had any official word from Whitehaven that a major shareholder was thinking of making a privatisation bid.

Frith’s objections are more sophisticated than this relatively simple objection implies and readers should read his analysis.

Chinese investment

The debate about foreign direct investment in Australia, particularly from China, was sent into overdrive with the acquisition of embattled cotton farm Cubbie Station.

The issue was largely framed as something that could split the Coalition, with Nationals Senator Barnaby Joyce adopting an increasingly hostile rhetoric compared to the more measured tones from Liberal Leader Tony Abbott.

"It would rarely be in Australia's national interest to allow a foreign government or its agencies to control an Australian business,” Mr Abbott said during his recent trip to China. It’s protectionist, but not to the same degree as Joyce, who is particularly concerned about Cubbie Station’s water allocations.

Just this morning there are a variety of different perspectives emerging that take this issue beyond the debate inside the Federal Coalition.

Firstly, the Australian Agricultural Company has told The Australian that this country’s antagonism towards foreign ownership of farmland needs to end. AACo is encouraging for the focus to shift on developing and building the food bowl, pointing out the foreign investment could help contribute.

Additionally, the qualified caution being promoted by Abbott looks to have been challenged by Victorian Liberal Premier Ted Baillieu.

The Premier told Fairfax that his state would welcome Chinese investors looking to fund, construct and run major infrastructure assets.

"There is enormous investment here, there is an enormous Chinese population here, both born in China and with one parent born in China,” Baillieu said.

"In my terms, it makes sense, it fits; this state's been built on foreign investment and gold. Gold was ours, foreign investment did the rest.”

Baillieu is in a tough spot politically. He’s trapped between the populist rhetoric of his party’s federal leader and his state’s desperate need for investment.

It will become increasingly difficult for state Liberal leaders to fall into line with Abbott’s foreign investment stance with state budgets struggling to meet infrastructure needs. Remember, Infrastructure Australia says we’ll need another $700 billion over the next generation; it was so much easier when the mining boom was tipped to pay for everything.

Another report this morning from Fairfax adds more depth to the discussion by looking at China’s point of view.

China’s economic planning agency, the National Development and Reform Commission, has released a draft proposal on outbound investment that requires companies to show a stronger commercial case and improved risk management.

Beijing is becoming increasingly aware of the waves that its outbound investment is stirring up in destination nations, particularly Australia and the US.

Prime Minister Julia Gillard is expected to call for stronger ties between Canberra and Beijing in the lead up to the long-awaited release of the white paper Australia in the Asian Century.

Perhaps there’s political room on both sides to find some common ground.

Fisher & Paykel, Haier

Speaking of Chinese investment, though directed across the Tasman, whitegoods giant Haier has revealed its $NZ869 million ($680 million) offer for New Zealand’s Fisher & Paykel.

The $NZ1.20 a share offer is a mouth-watering 70 per cent premium to the 75 cents closing price that F&P was at on Friday, before any news of a pending offer was revealed.

The F&P board has thrown its support behind the deal, subject to an independent expert’s report. Encouragingly, fund manager firm Allan Gray, which holds a 17.5 per cent stake in the target, says it will sell into the offer.

In this case, Haier is already in a strong position when you add Allan Gray’s share to its 20 per cent stake, which the Chinese player picked up in 2009.

Nine Entertainment, CVC Asia Pacific, Goldman Sachs

The opening gambit in the Nine Entertainment negotiations has come from investment bank and mezzanine debt holder Goldman Sachs.

Apparently it didn’t go well, but that’s how opening gambits are supposed to go.

Media reports indicate that US hedge funds Apollo Global Management and Oaktree Capital, which control the largest chunk of Nine debt, were taken through the proposal yesterday.

However, there appear to be differing reports about precisely what transpired.

The Australian Financial Review reports: "Goldman will be taking a sizeable haircut under its proposal while the hedge funds will not.” Additionally, the hedge funds will be able to mix the amount of debt and equity they hold in the final proposal.

However, The Australian reports that lenders are not convinced by the valuation multiple that Goldman has placed on Nine.

"Sources indicated a reluctance to writedown their claims in exchange for a 70 per cent equity stake in the company,” the newspaper reported. "They would prefer a proposal that did not require them to take what sources claimed was a $1 billion haircut, but rather set the equity conversion based on the full value of the debt.”

The AFR report might mean that the hedge funds won’t have to take a "sizeable haircut,” but will still have to take one. Then, The Australian’s $1 billion figure could be that ‘small’ writedown, but that doesn’t really feel right.

Breakfast Deals is a little confused. However, it’s not unusual for tit-for-tat leaks to emerge during high stakes negotiations of this sort. At present, there’s a total of $3.8 billion of debt attached to Nine Entertainment.

Wrapping up

Stunningly, there was little to no detail about what the Queensland government’s intentions are for the $2.8 billion stake in QR National.

The market is expecting a selldown. Perhaps Premier Campbell Newman felt that the larger than expected increases in coal production royalties complicated the picture enough for coal industry onlookers, without a pending sale of shares in the company that hauls the commodity to port.

Speaking of which, ports and rail operator Asciano has secured a five-year extension to its agreement with privately owned logistics company Linfox, which it says will generate revenue of up to $400 million.

Additionally, the beleaguered Oakajee port and rail project is looking increasingly shaky to analysts as the iron ore price continues to hover below levels that are sustainable for many mid-tier miners.

In healthcare, CSL Biotherapies has secured a contract with the US government that could be worth up to $1.5 billion. The deal covers the supply of pre-pandemic and pandemic vaccines antigens to the US Department of Health and Human Services.

Meanwhile, Lazard Australia has strengthened its footprint in Sydney by picking up independent advisory firm O’Sullivan Partners for an undisclosed amount.

Tony O’Sullivan, the company’s founder, will become Lazard’s head of investment banking in Sydney and report directly to Lazard chief executive and former Australian Independent Business Media investor John Wylie.

And finally, Matt Handbury, the nephew of media mogul Rupert Murdoch, is in negotiations with Allen & Unwin to sell his Murdoch Books business as book retailers struggle with a tough economy and the emergence of e-books.

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