BREAKFAST DEALS: GPT demons

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GPT Group looks set to announce a Manichaean split between good and evil, Ian Ferrier formally takes Goodman Group's chairmanship ahead of a speculated capital raising, and raising rumours for Bank of Queensland. Plus, updates on the steel showdown in China, Avoca's takeover offer for Dioro and much more.

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GPT Group

Listed real estate company GPT Group today looks set to announce a Manichaean split between good and evil. Good: its $9.1 billion worth of Australian shopping centres and office buildings; evil: its interest in a European joint venture it ran with Babcock & Brown. According to the Financial Review, the toxic assets will be funnelled into an unlisted company, allowing GPT's better half to renegotiate lending and present a stronger defence to acquisitive overtures from Stockland, which has a 13 per cent stake in GPT. An in-specie distribution will be made to existing unit holders, the AFR says, and would most likely have nil value after a $1.2 billion write-down. The joint venture itself is in receivership, carrying $4.84 billion in debt, as at March 31, and in breach of lending covenants on some assets. The assets that will be placed into the vehicle are valued at $4.8 billion, slightly below debt, comprising, $2.3 billion of German residential real estate, $1.5 billion of industrial real estate and $900 million of shopping centres, the AFR says.

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Goodman Group

Speaking of Manicheanism, Breakfast Deals' resident gnostic has foreseen a bad omen in the appointment of Ian Ferrier as chairman of Goodman Group. Not that Ferrier is a bad company director, far from it, it's just that he runs insolvency practice Ferrier Hodgson, and typically only gets involved when companies are really in trouble. Goodman Group has been limping along as the wider listed property sector struggles to avoid bankruptcy amid a heap of debt accumulated at the top of the commercial real estate cycle. Ferrier has been acting chairman of Goodman since late November last year when David Clarke, also chairman of Macquarie Group, took a leave of absence due to illness. Clarke has since made a full recovery and is set to return to MacBank next month. Clarke, BEc, is of course no relation to David Clarke, LLB, who earlier this month resigned from the board of AMP over negative comment regarding his leadership of the collapsed Allco Finance Group. For this reason he also opted to not stand for re-election to the board of Australia and New Zealand Banking Corporation. But on to happier news: the talk is still running hot that Goodman Group will proceed with a $1-$1.5 billion capital raising sometime very soon and it is thought China Investment Corporation will convert its preferred shares to common stock under the arrangement. Macquarie executed a controversial deal with Goodman in May whereby it lent $300 million so Goodman could meet refinancing commitments but took as payment 30 cent options over 414 million stapled securities.

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Bank of Queensland

Another company thought to be ready to pass around the cap is Bank of Queensland. The Fin Review has marked the regional lender as a logical candidate for a capital raising based on its tier-one capital ratio of 7.8 per cent. That was once a fairly generous number, but is now small by the standards of Australia's cashed-up banks (CUBs). Raising rumours for BoQ are of course not new however and Palladio Partners has been appointed to conduct, among a strategic review, a search for a cornerstone investor. A number of Asian parties have been speculated to be interested, including Singapore's big local three: DBS Bank, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank. Bank of Hawaii was once a 10 per cent shareholder until it sold its stake in 2001 and currently BRED Banque Populaire of France owns almost 9 per cent of BoQ. The other mooted option for BoQ is a merger with fellow Brisbanite Suncorp-Metway or Bendigo and Adelaide Bank further to the south. Both potential tie-ups have their pros and cons, although a deal with Suncorp will, to a large extent, depend on what happens with that group's rumoured banking and insurance split and will also have to wait until incoming chief executive Patrick Snowball climbs onboard. Snowball's strong insurance background (as opposed to his more colourful and talked-about military background) has kept punters tipping that a divestment of Suncorp's bank is only a matter of time.

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Iron ore pricing negotiations

BHP Billiton is closer to moving off the 40-year-old benchmark pricing regime for iron ore after confirming that it had settled 30 per cent of its 2009 volumes at non-benchmark prices. A move away from the controversial pricing system will see exporters like BHP and Rio Tinto earn more revenue but the continuing detainment of Rio executive Stern Hu in a Shanghai gaol makes the development a sore point with the Chinese government, which supports the benchmark system. Hu was arrested on suspicions that he stole "state secrets" in the process of negotiating discounts to the benchmark. Three other Rio staffers were also arrested along with a number of representatives from Chinese steel mills, many of which, to Beijing's displeasure, have been doing spot-price deals to get ore outside the benchmark system. A senior government advisor from the China Metallurgical Industrial Planning and Research Institute has meanwhile said that China should reduce the number of licensed iron ore importers from 112 to five. Communist China has been struggling to control its rampant capitalists but maintain growth and the iconic and important steel industry has been no exception. Efforts to negotiate cheaper benchmark buying have only led to higher spot prices however and attempts to create bigger steel mills through state-supported mergers have, in some cases, led to disaster. Last week 30,000 steel workers rioted in the northeastern city of Tonghua over plans to merge a state-owned mill with a private one were revealed to lead to job cuts. One executive from Jianlong Steel was killed in the unrest.

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Dioro Exploration

Gold minnow Dioro Exploration has finally caved into a takeover offer from Avoca Resources after a proposed deal with Canada's Northgate Minerals Corporation fell through earlier in the week. After months of calling Avoca's advances inadequate and opportunistic, Dioro has recommended that shareholders accept Avoca's latest one-for-2.3 offer in the absence of a superior proposal. The offer, which based on current prices values Dioro at 74.6 cents per share, is an about-face from previous arguments based on the controversial $1.40-$2.28 a share valuation independent expert KPMG ascribed to Dioro. It nevertheless represents an 89 per cent premium to Dioro's closing price on April 9, the day before Avoca made its first advance.

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Drillsearch Energy

One protracted takeover bid that's still going hostile however is Beach Petroleum's offer for Drillsearch Energy, though signs are emerging that it is coming to a head. Drillsearch's quarterly report to the end of June show that despite improved cash management it is still burning through the funds and although it yesterday issued an addendum that showed an improved cash balance of $8.14 million, outgoings of $2.42 million for the quarter were greater than total revenues of $2.25 million. Earlier this week Beach increased its stake in Drillsearch to 20.5 per cent.

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Huawei Technologies

Chinese technology firm Huawei Technologies contacted Business Spectator following mention of the company in Monday's Breakfast Deals, to stress that UK reports that the company has links to the Chinese military and has been at the centre of spying fears are unfounded and wrong.

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Wrapping up

GLG Partners, a huge hedge fund, is set to launch a $500m oil production venture listed in London. The move represents a more direct, hands-on strategy than the company has previously employed. Perhaps in a sign of things to come in Australia, Kohlberg Kravis Roberts is said to be preparing the initial public offer for discount retailer Dollar General Corporation. It has been speculated that private equity-owned retailers Myer and Kathmandu may be floated in Australia this year. In the continuing flight of airline companies to consolidate, American Airlines has said it expects US authorities to grant it antitrust immunity to align with British Airways and Spain's Iberia. Lufthansa's proposed acquisition of Austrian Airlines has meanwhile been scheduled for September. And finally, Microsoft and Yahoo have signed a 10-year search engine revenue sharing partnership to show a united front to market leader Google. Under the deal, Microsoft's Bing search engine will be used on Yahoo's websites and Yahoo will handle search advertising sales for both companies.