BREAKFAST DEALS: Fairfax farewell
Fairfax Media
Fairfax Media is making a habit of chewing through its CEOs with Brian McCarthy becoming the third chief executive to bid farewell to the media outfit in the last five years. While the official line from Fairfax is that McCarthy was unable to commit to leading the company for the next three to five years there is talk that McCarthy and Fairfax's chairman Roger Corbett just did not see eye to eye when it came to moving the company forward. The much touted five-year strategic plan released by McCarthy in November may have proved to be last straw for Corbett and the Fairfax board especially after the inquiry, conducted by consultants Bain & Co, was light on details and failed to provide any real guidance to investors who were expecting a lot more. According to The Australian, McCarthy's performance at the investor day on November was also substandard and a sign that his heart was no longer in the job. There is also talk that McCarthy had started voicing his frustration to close associates in recent times while Corbett was also voicing his own concerns about McCarthy's continued commitment to the top job. If there is any credence to these rumours, remember they are from News Limited papers, then it is a remarkable turnaround for McCarthy who not that long ago was raring to go and lead Fairfax into the digital age. As it turns out that task now temporarily rests with former senior Fairfax executive and journalist, Greg Hywood, who returned to Fairfax in September. While Fairfax said it is conducting a search for a new CEO Hywood may well have to fill McCarthy's shoes permanently.
Rio Tinto, Riversdale Mining
Riversdale Mining shares jumped over 15 per cent yesterday after the coking coal miner confirmed it was in talks with Rio Tinto about a possible takeover. Rio has reportedly put a $3.5 billion offer, at $15 a share, for Riversdale but the target has been quick to point out that Rio wasn't in a position to submit a takeover proposal at the moment. That's not really a surprise given the sort of manoeuvring that Rio will have to do as it navigates Riversdale's complex share registry and the surge in Riversdale's share has pretty much put the takeover premium offered by Rio into shade. The main questions now are firstly just what shape is Rio's offer going to take and secondly is there a chance of a counter bidder coming into the game. On the first count The Australian Financial Review suggests that Rio is unlikely to launch a full takeover of Riversdale but opt to secure a majority stake. Rio has a good track record of doing this with its move to take majority ownership of Coal and Allied and listed aluminium producer Comalco. In the case of Comalco, Rio eventually took full control of the company allowing it to defray some of the development costs. The AFR reckons a similar structure may be put in place here by Rio, which would make a lot of sense given that developing infrastructure at Riversdale's project could cost up to $4 billion dollars and defraying those costs while still controlling the assets will be a win for Rio. With regards to a bidding war there are some who say that the market may be getting a little ahead of itself given the fact that major shareholders – Tata Steel, CSN and Passport Capital – may not be willing to play ball with any interested suitor. Brazilian mining giant Vale has been tipped by many as a likely counter-bidder but Vale already has substantial coal exposure in Mozambique and CSN is its direct rival and will be unlikely to deal with a competitor. BHP Billiton is also unlikely to wade into this deal given its existing dominant position in the global coking coal market. A move for Riversdale could again agitate regulators and that's the last thing BHP wants. This is Rio's first foray into the M&A field since its ill-fated acquisition of Alcan so the stakes are high here for the miner to not slip up on Riversdale. Rio has the size and capacity to outbid rivals if a bidding war does emerge and as for Riversdale's top shareholders time will tell if a promise of bringing Riversdale's projects online ahead of schedule and an offer sweeter than the $15 a share is enough to swing their vote in Rio's favour.
ASX, SGX
Local stock exchange operator ASX Limited has fired its latest salvo in its bid to get the necessary regulatory approval for its proposed $8.4 billion merger with Singapore Exchange Limited (SGX), saying that the deal complies with Australia's national interests. The merger announced in October promptly sparked a wave of political sabre rattling as many pointed out that the agreement to create the world's fifth largest stock exchange may not be such a good thing. Greens leader Bob Brown said at the time that his party, which may have an influential part to play in how things pan out, did not see an advantage for Australia in having the "stock exchange controlled from Singapore." Not so says the ASX, which has recruited Access Economics to make the case for it. According to the report, the merged entity will improve Australia's chances of becoming a financial services hub in Asia, improve the ability of Australians to diversify their savings and lower the cost of capital for Australian companies. The other positive thing ASX's management is keen to point out is that the merger will not undermine any regulatory control of the local market. In a positive for the ASX, the report also dispels another politically sensitive point of whether the deal would reduce regulatory control of Australia's market. While the move by ASX is step in the right direction there will be some who will point out that the stock market operator and its partner SGX probably should have presented these arguments at the start of the process. Still it's better late than never and given the hoops this merger has to jump through any information that dispels irrational fear of the deal is welcome. The tie-up requires the blessings of the Australian Securities and Investments Commission (ASIC), the Reserve Bank of Australia (RBA), the Foreign Investment Review Board (FIRB) and needs Canberra to lift the 15 per cent ownership cap imposed on assets of national significance. The Australian Competition and Consumer Commission (ACCC) plans to release its ruling on the deal by January 27 and ASX chief executive Robert Elstone reckons that the deal should be sealed in the May to June period of 2011.
Sigma Pharmaceuticals
Sigma Pharmaceuticals boss Mark Hooper is facing another challenge in what has been an interesting year for the company. Apart from the multiple profit warnings and a big write-down on its generic drug business Sigma is now facing the grim prospect of taking a substantial hit to its wholesale revenues from 2011. The latest bump in the road to Sigma's rehabilitation has come courtesy of US drugmaker Pfizer which has decided to take its medicine direct to pharmacies. The expansion of the drug maker's "Pfizer Direct” model spells a 10 to 15 per cent fall in Sigma's annual wholesale revenues. Analysts suggest that could be a $300 million hit for Sigma which has cut its earnings guidance last month, with earnings before interest and tax (EBIT) for the 12 months to January 2011 now expected to be $120 million to $130 million, compared with previous guidance of $140 million to $150 million. With South Africa's Aspen Pharmacare set to take the pharmaceutical business off Sigma's hands later this month the company's continued existence will rely solely on wholesale distribution. If other drug makers choose to follow Pfizer's lead to go direct it raises a chilling prospect for Hooper and his bid to nurse Sigma back to health. Of course, Sigma isn't the only one in the lurch here with its rival Australian Pharmaceutical Industries Ltd (API) also set to take a hit. API said yesterday that Pfizer's move combined with initiatives by the federal government to reduce the cost of the Pharmaceutical Benefits Scheme (PBS) will cut its annual revenue by 10 to 15 per cent. Pfizer had said that its move to cut wholesalers out of the picture was influenced by the changes to the PBS, which API expects to cost the wholesale sector in the order of $220 million between 2010 and 2015. The other thing to keep in mind is that patents to a number of Pfizer's best-selling drugs are due to expire soon and it's in Pfizer's best interest to find a direct route to the pharmacy shelves and remove the middle man. Meanwhile, there's been a bit of moving and shaking at Pfizer's head office over the weekend with the drug maker's CEO Jeffrey Kindler relinquishing his role. Kindler, who lead Pfizer through the $US68 billion purchase of Wyeth Pharmaceuticals last year, wasn't exactly popular with Pfizer shareholders. Pfizer's stock had fallen about 36 per cent since Kindler started his stint in July 2006 and his tenure was also marked with federal investigations on the company's off-label marketing of drugs. Pfizer settled the affair with a whopping $US2.3 billion payment, including a $US1.3 billion criminal fine for illegal marketing of the pain killer Bextra.
Wrapping up
Leighton Holdings' German majority shareholder Hochtief has not given up its efforts to fend off its Spanish suitor ACS, with the construction company enlisting some foreign help. According to Reuters, Hochtief is set to offload a 9.1 per cent stake to Qatar Holding, an investment vehicle of the Gulf state's government, for 400 million euros. Qatar Holding will buy seven million new Hochtief shares at 57.114 euros per share. The rub for ACS is that the deal means it will have to pay more to win control of Hochtief, about 200 million euros more, given that Hochtief's capital increase will dilute ACS' stake to about 27 per cent from 29.9 per cent. HSBC has appointed Sean Henderson to lead its debt capital markets team in Australia. Henderson, who is set to start in January, will oversee the debt capital markets team responsible for the origination of bonds and loans for Australian clients in addition to execution of Australian dollar product, HSBC said in a statement. Locally, HSBC is number two in international bond issuance for Australia and New Zealand and number six as a new entrant into the Kangaroo bond market. HSBC is also number one in Asia-Pacific ex-Japan bonds, number one in sterling bonds and number four in euro bonds. In other news, UBS has announced that its board of directors has appointed Tom Naratil as group chief financial officer and member of the group executive board, with effect from June 1, 2011, and Sergio Ermotti as chairman and CEO of Europe, Middle East and Africa (EMEA) and member of the group executive board, with effect from April 1, 2011. Meanwhile, London-based hedge fund Caxton Associates is reportedly on its way to Australia with plans to open an office in Sydney. According to the Financial Times, Caxton's move is part of its push to expand its presence in the Asia-Pacific region. Caxton, which specialises in trading bonds, currencies, rates and stocks, manages about $9 billion for its clients. Metminco Limited has completed the purchase of the remaining interest in unlisted Hampton Mining Limited, giving Metminco full control over Hampton's South American assets. Metminco has simultaneously completed a $30 million capital raising to fund ongoing exploration of these assets. Elsewhere, New Zealand-based merchant services provider Smartpay is looking to list on the Australian Stock Exchange by mid-2011. Smartpay also said it will consider joint ventures and strategic alliances as part of its Australian growth strategy.
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