Breakfast Deals: Elusive Envestra

APA Group might have to dig a little deeper if it’s to win Envestra as a merger partner. Almost all signs point to a ‘no’ answer to the current $1.3 billion offer. Meanwhile, Billabong International’s lenders are none-too-pleased at being refused an opportunity to counter Altamont Capital Partners’ recapitalisation offer, but they have hardly been left with nothing. Also, Federation Centres has snapped up two more shopping centres.

APA Group, Envestra

It’s looking increasingly likely that gas pipeline operator APA Group will have to improve its $1.3 billion merger offer for Envestra if it’s to win over the target’s directors.

Envestra chief executive Ian Little says no board decision has been made as yet, but the benefits for shareholders are not obvious with the current offer.

While APA has put an implied takeover premium of 11 per cent on the table with its 0.1678 stapled security offer, that premium has been erased by subsequent trading.

The suitor would naturally remind the target’s register that, if they reject the offer, those trades would in all likelihood be unwound in the absence of competitive tension.

But now Credit Suisse has piled on by changing its price target to $1.22 from 91 cents. The investment bank said this reflects the potential increase in the implied value being offered by APA from its current level of $1.10.

Envestra shares finished trading 0.5 cents down yesterday at $1.12, further reflecting an expectation of a higher offer.

APA owns 33 per cent of Envestra, making it the largest player on the register. As of yet, there’s still been no word from Envestra’s second largest shareholder, which is Hong Kong’s Cheung Kong Infrastructure at about 17 per cent.

Because of the structure of this deal, APA requires 75 per cent approval to win Envestra over. But, as it’s barred from voting, Cheung Kong’s stake amounts to an effective blocking stake.

Again, because APA already has 33 per cent of Envestra, this is the most logical next step for the company and it also makes rival proposals terribly unlikely.

That doesn’t mean it’s easy, however.

Billabong International, Centerbridge Partners, Oaktree Capital

Billabong International shares rallied 34 per cent yesterday as investors celebrated the surfwear maker’s newfound security.

But instead of being able to celebrate for the first time in a long time, Billabong chairman Ian Pollard was batting away questions about the surfwear maker’s apparent recalcitrance towards a potentially superior offer.

It’s emerged that representatives of US hedge funds Oaktree Capital and Centerbridge Partners, which both snapped up Billabong debt in the lead-up to the recapitalisation and asset sale agreement with New York’s Altamont Capital Partners, flew to Australia on Tuesday to present an idea of their own.

It has been reported that Oaktree and Centerbridge had proposed a debt-for-equity swap to take a 60 per cent stake in Billabong that could have been superior to Altamont’s proposal.

But Billabong refused to meet with the pair before announcing the Altamont deal. Pollard is quoted in this morning’s papers saying the two hedge funds had reached out earlier, but said a quantitative proposal wouldn’t be forthcoming without due diligence.

You might remember Oaktree from the run-in with Nine Entertainment where the same move was carried out. Buy the company’s debt in the lead-up to a maturity deadline, then squeeze.

Oaktree and Centerbridge picked up the Billabong debt from the big four Australian banks, as well as Bank of America Merrill Lynch and Societe Generale, all of which was reportedly at a discount.

We all remember the crisis meetings between Oaktree, fellow opportunist Apollo Global Management, and Nine’s mezzanine lender Goldman Sachs. It was messy as all hell.

Apparently, Centerbridge and Oaktree are frustrated, even angry that Billabong wouldn’t give them a hearing despite their decision to fly out to Australia. Fly out! You mean, like, on a plane and everything?

As part of the structure of the Altamont deal, apparently the $65 million break fee was enough to have the two hedge funds thinking they’d get a chance to put their view forward.

It’s a big break fee – about half the value of Billabong today. But were it not for the spectacular collapse of Billabong’s share price over the last two years, Pollard might be able to dismiss this proposal a little more easily.

Billabong has been in almost a perpetual state of due diligence for over a year. The ‘for sale’ sign has been up for all to see.

Oaktree and Centerbridge waited until they’d secured a debt position in Billabong to play their hand, rather than lining up like other suitors over the last year or so. It’s a perfectly legitimate tactic, but Billabong has every right to treat such a strategy with suspicion.

And given that the debt has been purchase without the kind of leverage Oaktree and others enjoyed over Nine, Billabong also has the room to say no.

If they’re still angry at the Billabong board after having gone to such efforts to win their favour, at least they can console themselves that the profits made on Billabong’s debt will more than cover the Trans-Pacific business class flights home.

Those profits were made as a result of buying debt at a discount that Altamont will now pay out in full.

Wrapping up

ASX-listed SkyCity Entertainment Group has received approval to purchase Queenstown’s Wharf Casino for $NZ5 million. 

The dual-listed casino company is also building a $NZ402 million ($348.58 million) convention centre in Auckland after a deal struck earlier this month.

Elsewhere, Federation Centres has reportedly picked up two additional shopping centres worth a combined $67 million from investors in syndicate businesses that it manages.

According to The Australian, the company once known as Centro has picked up a shopping centre in Albury and the Brisbane neighbourhood centre of Darra.

And finally, the same newspaper believes that global giant Lasalle Investment Management is keenly chasing Brookfield’s $574 million-plus hotel portfolio.