BREAKFAST DEALS: M&A maelstrom

Australia's M&A market is in a slump, although there may be a glimmer of hope.

Australia’s M&A market is in a terrible ditch and no one knows quite when it will climb out. Two reports explain how the mining industry is well off last year’s levels, but there might be a glimmer of hope in the gold sector. Right on cue, global gold giant AngloGold Ashanti is mulling a possible listing of its Australian assets. Meanwhile, Australia’s steelmakers are in the spotlight, ACCC boss Rod Sims isn’t taking the Virgin Australia deals lightly and nib Holdings has found a way into New Zealand (did they fly Virgin business?)

Australia’s M&A Scoreboard
 
Two reports from the big global accounting firms have further underlined what a funk the Australian mining industry is in through the prism of M&A. But one of them says there is a silver — or perhaps gold — lining.
 
All surveys on Australia’s broader M&A industry have shown that mining and energy still rank as the greatest contributors to activity. But reports from Ernst & Young and PricewaterhouseCoopers show how even these sectors have ebbed from their epic flows.
 
The E&Y mining M&A report shows that the value of deals halved to $US14 billion ($13.5 billion) in the first nine months of the calendar year, while the number of deals slipped 17 per cent to 167. This shows that there’s been a dearth of mega-deals that once inflated that total deal value figure.
 
The PwC report doesn’t compare the same data, excluding companies with market caps above $5 billion and counting acquisitions that haven’t happened yet, or that fell apart. The figures show that the total value of deals fell to $25.1 billion for the 12 months to December, down from $40.2 billion in the previous corresponding period.
 
While the two reports don’t compare the same time period, the results really do feel familiar when viewed together. Both point to a reduction in the scale of the acquisitions that are getting done, while the PwC report shows that M&A deals are less and less ambitious in scale, regardless of whether they turn out or not.
 
Where’s that gold lining?
 
PwC energy, utilities and mining leader Jock O’Callaghan says that Australian mid-tier miners could be in for a pick up in activity, particularly in the gold sector.
 
"The goldminers have begun a race to scale,” O'Callaghan says in the report.
 
"Rising costs, attractive equity valuations and large global players looking to replenish reserves should drive takeover activity."
 
AngloGold Ashanti
 
We mightn’t have to wait too long for one of the global behemoths to move.
 
According to The Australian, AngloGold Ashanti has flagged a possible spin-off of its Australian assets after spending time last week meeting with investors.
 
The newspaper says that the spin-off would be a locally listed player on the ASX, which would be a glowing endorsement of the Australian market in more ways that one if it can be made a reality.
 
It would also mean that Newcrest Mining would have a significant local listing to compete against. Of course Newcrest purchased the last major local player, Lihir Gold, in mid-2010.
 
Some Newcrest shareholders have voiced frustration since that deal, as the share price has fallen significantly, in contrast to the gold price.
 
While their annoyance may be warranted, it’s seldom mentioned that Newcrest isn’t the only gold company to see a decoupling of its share price from the gold price of sorts. However, Newcrest’s has been quite severe and the problems with the Lihir portfolio are undeniable.
 
If AngloGold enters the Australian market thanks in no small way due to the room created by Newcrest’s move on Lihir, it’ll take yet more shine off the deal.
 
BlueScope Steel, Arrium
 
Don’t get your hopes up, these guys aren’t merging. But they both have deals on the go.
 
On Friday, Bluescope Steel announced its plans to raise $US300 million from investors in the US searching for high-yield.
 
Ratings agency Standard & Poor’s gave Bluescope a BB rating, which is two levels below the coveted investment grade status. The fact that BlueScope can chase these investors at all is symptomatic of the desire of many global players for exposure to Australian companies, even if they aren’t up to the gold standard.
 
Meanwhile, the Australian market isn’t entirely convinced yet that the bell of the ball will be left without a dance partner at the end of the evening. We’re talking of course about fellow steelmaker Arrium.
 
The company’s share price finished trading last week at 70 cents a share. While that’s well short of the improved 88 cents offer from Asian consortium Steelmakers Australia, it’s well north of the 55 cents that the stock was trading at before the deal emerged at the beginning of October.
 
This is probably a reflection of the reports that representatives from Steelmakers Australia met with South Australian Premier Jay Weatherill, having informed Arrium that it will no longer seek to engage the board.
 
The possibility of a fresh bid remains – suitors say they won’t return for another crack right up until the moment they do. But Arrium can’t rely on such interest.
 
The company is swiftly moving on with the business of talking up the business, so shareholders don’t feel aggrieved by the idea that they could have been talked out of a takeover premium.
 
The Australian Financial Review reports that Arrium chief executive Geoff Plummer told reporters in Adelaide the company’s target cost for iron ore production was $52 to $57 a tonne.
 
The context with which the Steelmakers Australia bid emerged was that iron ore prices had fallen out of the sky, smashed through the theoretical floor price of $US110 a tonne, and put a lot of higher cost players under pressure, most notably Fortescue Metals Group.
 
Plummer, apart from simply updating the market on what his company is up to, is reassuring investors that the company’s business model is being structured to insulate itself from another price plunge event. This makes it less vulnerable to another opportunistic play from, say for example, an Asian consortium hoping to coax nervous investors to sell a little early and a little low.
 
Virgin Australia, Tiger Airways Australia, SkyWest
 
Consumer watchdog Rod Sims has conceded that the decisions he needs to make about Virgin Australia and its proposed deals with Tiger Airways Australia and Skywest are challenging from a regulatory standpoint.
 
Speaking to ABC Television’s Inside Business program, Sims said the Australia Competition and Consumer Commission (ACCC) was facing a "tricky one,” where it has to find a balance between strengthening Virgin to take on Qantas Airways without diminishing the potential for other players.
 
"We have to weigh that up carefully, and we will, and there's no signals I can send about how we are going to come out,” Sims told the program.
 
Both deals are being paid for with the sale of a 10 per cent stake to alliance partner Singapore Airlines. It’s a cunning deal that strengthens ties with international partners while enhancing domestic competitiveness. John Borghetti is flying high right now.
 
As for what the final outcome should be, Breakfast Deals likes the analysis provided by one of the Inside Business panellists Tom Elliott, chief investment officer of Beulah Capital. He argues that we should look at the history of Australian aviation – it’s one of evolving duopolies.
 
"Every time you get more than two players, people start going bust and then four become three become two,” said Elliott.
 
"Just in my adult lifetime, 15 years ago we had about four players briefly. Again it went back to two. The players do change. Ansett went bust. There will be two players. Just about nothing is more guaranteed in the Australian market.”
 
nib Holdings, Tower Medical Insurance
 
Health insurer nib Holdings says it’s been looking to move into the New Zealand market for some time. Tower Medical Insurance met its criteria.
 
The Australian-listed insurer announced on Friday that it has picked up the health insurance arm of New Zealand’s Tower for $NZ102 million ($80 million).
 
According to nib, Tower has 13 per cent of the market and the acquisition will deliver "substantial, immediate accretion to earnings per share and return on equity.”
 
Tower has been struggling to make its health insurance arm really sing and it’s hoped that nib might have some better luck.
 
JPMorgan and Simpson Grierson acted as advisers for nib.

Wrapping up
 
Mining giant BHP Billiton got some tongues wagging last week with news that it has sold its undeveloped alumina refinery project in Guinea to one of its joint venture partners Global Alumina Corp.
 
While it ostensibly changed hands for an undisclosed price, The Australian Financial Review reports that the pair shook hands for $US1, with BHP having invested $US266 million.
 
This raises serious questions about the future that aluminium has for BHP Billiton. The price tag might reflect the dour situation that selling aluminium players are finding. Remember, Rio Tinto has been entertaining plans of what to do with Pacific Aluminium since over a year.
 
Staying with mining, ASX-listed Resolute Mining sweetened its financing offer for Noble Mineral Resources on Friday, which could perhaps have inspired some negotiations with Chinese group Zhongrun, which has a rival proposal.
 
Meanwhile, gas pipeline company APA Group won’t let up when it comes to acquisitions, even after bagging Hastings Diversified Utilities Fund for $1.6 billion.
 
Speaking to The Australian Financial Review, APA chairman Len Bleasel said id an opportunity came along that was compelling enough "we’d get the money”.