BREAKFAST DEALS: Finance fight

A bidding war is set to erupt for control of financial services firm Trust Co, while dreams of a Westside-PetroChina deal are finally dashed.

Trust Co is officially the subject of a bidding war with Equity Trustees coming back with an offer to rival that of larger suitor Perpetual. The presence of scrip in this deal makes it all the more interesting. Meanwhile, WestSide Corporation has finally confirmed that PetroChina isn’t interested anymore. Was it ever? And finally, the deals industry’s most important regulator, the ACCC, has a few extra million to work with from the federal budget.

Trust Co, Perpetual, Equity Trustees

This deals columnist is happy to report that the phrase ‘bidding war’ can be officially dusted off for the Australian market after a long time on the shelf.

For some time we’ve been talking about potential bidding wars when sometimes unnamed rivals have circled an embattled company. Billabong International came close, but they knocked both private equity suitors back and a bidding war became a fire sale.

Equity Trustees has come back with a counter-offer to much larger rival Perpetual for Trust Co. The ‘David’ in this story is bidding 37 shares, up from 34 shares, for every 100 Trust Co stocks. The offer is conditional on due diligence.

Last week, ‘Goliath’ Perpetual offered 0.1495 shares for each Trust Co share, which gives its offer a value of roughly $7.02 a share to Equity Trustees’ latest proposal of $6.77.

It’s not just the bidding war that makes this a ‘first in a long time’ moment. The two bidders are using scrip.

Don’t believe this is a cash-and-scrip deal because the funds for the 22 cents special dividend that both companies are offering come from Trust itself. If the bidding party doesn’t throw in a cent of its own money, it’s a scrip offer.

Anyway, it’s a very different selling dynamic. In the wake of the global financial crisis investors were demanding cash due to a lack of confidence in equities.

When you’re bidding cash, the sales pitch is simpler. ‘Here’s a pile of money. In the absence of a superior offer, if you think your board can’t match that value in a reasonable period of time, you should take it.’

In a scrip offer, the bidder has to sell their company, not their cash, against what the target’s board can offer.

With this in mind, take a look at how Equity Trustees chief executive Robin Burns sells his inferior headline offer to the Trust Co shareholders.

“The relative headline values of the bids will go up and down, and yes, Perpetual's offer is higher than ours today,” Burns said.

“But under our offer, Trust Co shareholders get 62 per cent of the merged company and 62 per cent of the benefits.”

Trust Co shareholders would end up owning as little as 8 per cent of Perpetual; effectively they’d be absorbed by a relative giant. With Equity Trustees things are much more equal.

The balance is between the fortunes of an established giant, Perpetual, versus the potential of two smaller, nimble operators joining forces.

And let’s also take a look at the recent movements of the Perpetual share price.

In the last 11 months the stock has doubled, plus another 10 per cent. Wind back the clock the same amount of time and Perpetual would have to dilute its register far too much to bid for Trust Co with scrip.

That’s what an equity rally can do. We almost forgot about that.

And on that note, remember when Perpetual was copping it from all sides because its share price was trading below $20 after the board rejected Kohlberg Kravis Roberts at $38-$40 a share in late 2010?

They probably deserved the flak at the time, but time has also healed some of those wounds. The stock closed yesterday at $45.50.

PetroChina, WestSide Corporation

Chinese oil giant PetroChina has withdrawn its $185 million takeover offer (that never really was) for Queensland coal-seam gas company WestSide Corporation that was first lodged in November.

The indicative, non-binding proposal at 52 cents a share has been hanging over the company with no firm signs that PetroChina was particularly serious about pressing forward.

The share price has always reflected this. Aside from a brief flurry at the time the interest was first announced, WestSide shares have traded at a significant discount to the indicative offer price.

Yesterday the stock plunged 10.7 per cent to 25 cents.

WestSide quoted PetroChina in its statement to shareholders, saying the reason it had withdrawn the offer was “because the general situation in Australia has changed so much”.

General situation…how detailed. I guess that can happen when a bidder waits six months to call off negotiations that never really got off the ground.

WestSide said it has considered a number of alternative transaction structures and continues to explore them.

Budget 2013 and ACCC

Not all Australia’s major regulators benefitted from the federal budget, but the most important body to the deals industry, the Australian Competition and Consumer Commission, has received a little boost.

The ACCC’s budget has been bumped up to $158 million from $152 million, with the government angling the regulator towards taking on more cases with the promise of more cash when the cases are commenced.

Not all the regulatory bodies were so lucky. The Australian Securities and Investments Commission has seen its budget slashed to $576 million from $739 million, although The Australian Financial Review brings word from Treasury officials that much of that appears to closing an account relating to unclaimed monies.

The Australian Taxation Office will get an additional $78 million over the next four years, although because it’s a revenue raising entity it’s expected to pay-off by a number of factors.

Wrapping up

Underground mining contractor Barminco has edged again towards a public listing. The company has refinanced its debt via a $US485 million ($486 million) senior note offering.

Turbulent equity markets derailed Barminco from listing on the ASX in 2011. It wasn’t alone and we’re still waiting for an IPO resurgence.

Still in mining, South Boulder Mines shares rose yesterday on the back of an agreement with the Eritrean government for a 50-50 joint venture over the Colluli potash project in the northwest African nation.

And finally, investment bank Macquarie Group has joined its retail rivals on the hybrid security train with plans to raise up to $400 million.