BREAKFAST DEALS: Diamond's aren't forever

BHP Billiton exits its diamond business with a sale to Harry Winston, while some of Fortescue's infrastructure might be up for grabs.

Diamonds might be a girl’s best friend, but they’re BHP Billiton’s old acquaintance. The mining giant announced overnight that it’s now out of the diamond business, selling its EKATI mine in Canada to Harry Winston. Fortescue Metals Group is reportedly thinking about its options when it comes to the ownership of its rail and port infrastructure. Meanwhile, worrying questions are being asked about whether all our free-to-air broadcasters can survive and Leighton Holdings is monitoring the Brisconnections saga.

BHP Billiton, Harry Winston

It has taken BHP Billiton just under a year to get out of the diamond mining business. But finally, BHP’s 80 per cent stake in the Canadian EKATI diamond mine in Canada has a new owner – iconic jewellery company Harry Winston.

The miner will receive $US500 million for the sale, pending regulatory approval, with the buyer opting for a mix of debt and cash reserves to foot the bill.

It also means that BHP will take a roughly $US200 million non-cash writedown against the asset.

Harry Winston was initially jostling for position with private equity group Kohlberg Kravis Roberts and legendary diamond group De Beers.

Indeed at one stage it was hoped that KKR might try to bid for the diamond assets of BHP and rival Rio Tinto at the same time with the hope of combining them. Ultimately, this didn’t come to pass and Harry Winston ended up being the only firm bidder for BHP.

BHP non-ferrous metals boss Andrew Mackenzie, one of the favourites to succeed chief executive Marius Kloppers in the wake of succession planning reports, said the decision is "consistent” with the miner’s focus on top-shelf, long-life, low-cost and expandable projects.

The Australian miner sold out of its other diamond asset in December. Partner Peregrine Diamonds picked up the majority stake in the Chidliak exploration project for $C9 million ($8.5 million).

Fortescue Metals Group

Fortescue Metals Group is reportedly considering the possible partial sale options for its coveted infrastructure assets in order to lower its $US10 billion debt.

According to The Australian Financial Review, the people at Macquarie Capital came up with the proposals that Fortescue is still looking over.

The newspaper also reports that Macquarie is talking to QR National, Atlas Iron, Brockmand Resources and billionaire Gina Rinehart.

You might remember QR National and Atlas Iron boosted hopes for junior producers earlier this year by announcing a feasibility study for another rail line. At the moment, smaller players are at the mercy of the infrastructure owners – BHP Billiton, Rio Tinto and Fortescue Metals Group. But this raised the possibility of a train line for the little guys.

Since then, the iron ore price has come off significantly, putting Fortescue into a brief but nerve-racking period where it refinanced it debt. Fortescue survived that episode unscathed.

But with iron ore prices still well off their highs of $US180 a tonne to which they’re unlikely to return, it makes far more sense for Atlas to talk to Andrew Forrest’s company, particularly if it’s looking seriously at taking out some of its debt.

Ten Network, Seven West Media, Nine Entertainment

All three of Australia’s commercial, free-to-air broadcasters have hit trouble in recent months. Seven West Media has watched its advertising revenue dry up and its main rival rebound.

That main rival is Nine Entertainment, the survival of which was under question thanks to a long-fought ownership battle, which provided more speculation fodder for business journalists than any other story this year.

But the broadcaster that’s in the most trouble is Ten Network, a fact that was underlined in yesterday’s results.

In the company’s annual review, chairman Lachlan Murdoch said there was "no hiding” from the company’s terrible ratings and the expensive programming experiments were "unacceptable”.

Ten is now paying a bigger psychic price for those mistakes. Well-liked newsreader Helen Kapalos has been removed in what appear to be less-than-amicable circumstances. The Melbourne news reading duties will be left to veteran Mal Walden.

Long-time members of Ten’s Sydney stable, Ron Wilson and Bill Woods, have also been axed, along with Craig Smart from Perth.

All this is part of a cost-cutting exercise that’s running deeper because of previous programming errors, including the ill-fated Breakfast show.

In 2012, Ten’s market cap has slipped from around $1.3 billion to $395 million. This slide has meant the broadcaster has consistently come up as a potential takeover target, especially for private equity.

What must be remembered is that if private equity did take Ten, there’s a good chance that they would have sacked those same journalists in an effort to get costs down.

But there’s a grim suggestion that’s been raised in Fairfax newspapers this morning that doesn’t bode well for Ten as a publicly traded or privately acquired company. What if there just isn’t enough room for three Australian commercial free-to-air broadcasters anymore?

It’s investor Laurence Freedman that’s asking the question. Freedman rescued Ten in conjunction with a posse of other investors back in the 1990s.

The suggestion really puts the calls that pop up every now and again for the federal government to issue a fourth free-to-air licence into perspective. Once upon a time such a licence was valued at $1 billion.

It also emphasises just how much risk a potential acquirer would be taking on if they had a crack at Ten. The higher the risk, the lower the price.

Much of this discussion is putting the cart before the horse. No one appears to be circling Ten and a rebound in advertising revenue would quickly ease a lot of pain.

Brisconnections, Leighton Holdings

With Brisconnections in an indefinite trading suspension as discussions with its lenders heat up, one of the most interested onlookers will be Leighton Holdings.

The construction company said it is reviewing the carrying value of $200 million in deferred equity commitments for Brisconnections, which is currently listed on its books at $63 million.

Leighton has already copped a strong of writedowns on the Brisbane Airport Link project. Thankfully, however, Leighton says the Brisconnections situation won’t hurt its $400-$450 million profit forecast, with the proceeds of the Thiess Waste Management sale covering the potential gap.

As Business Spectator’s Stephen Bartholomeuesz explains, Brisconnections has been a victim of timing.

"BrisConnections was an early victim of the sea-change in attitude towards listed infrastructure once the crisis developed, well before the Airport Link was actually built.

"The fact that it used a three-tranche instalment structure and only the first of three $1 per security payments had been made when the crisis, and BrisConnections’ own first crisis, developed ensured it got off to a terrible start.

"Security holders, many of them ‘mums and dads’ who bought up the initial instalment receipts at fractions of cent each, were caught with residual $2 per security liabilities and the prospect of throwing a lot of good after small amounts of bad.”

While those mums and dads might have felt trapped by those arrangement, lenders have reportedly agreed to extend a ‘lock-up’ arrangement to try to keep things as stable as possible through negotiations.

According to The Australian Financial Review, ANZ Banking Group and nine offshore lenders have agreed to maintain the $3 billion exposure, with none of them allowed to trade the debt.

The newspaper understands that the arrangement was supposed to end in July, when the AirportLinkM7 opened up. It’s been renewed monthly since then.

Wrapping up

The big supermarkets are up and about, according to the AFR. The newspaper says Woolworths has inked a five-year service deal with Israeli software provider Retalix. The company has delivered software solutions for international behemoths like Tesco and Carrefour, and will provide point of sale support for Woolworths' locations.

Meanwhile, the newspaper also says Coles is searching for a joint venture partner for its $900 million hotels and gaming assets. The idea is that will put some distance between it and the not-so-loved aspects of these businesses.

Elsewhere, Fairfax Media reports that IOOF has picked up a large warehouse currently occupied by online retailer CatchoftheDay for $24 million.

And finally, The Australian carries a big story this morning detailing the successful push of little-known Chinese property firm Shanghai Zhongfu to secure the rights to 15,200ha of coveted irrigated land in northern Australia.

Expect a lot more to be heard on this. The resources boom isn’t over, but pivoting from hard commodities to soft commodities.

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