Australian deals fall by a third compared to last year, but Echo, Qantas and David Jones keep the speculators entertained.

With the first half of 2012 behind us, Dealogic has compiled its numbers on the Australian sector and the story is a familiar one. We’re good when you look at almost everyone else, but that’s still disappointing. However, Beulah Capital director and M&A watcher Tom Elliott gives his take on a few potential deals that might be of interest. Meanwhile, there are two possible takeaways from the latest Echo news from James Packer, Qantas is said to be talking to another Middle Eastern player about codesharing, Cardno has another two bolt-ons nailed down and Flinders Mines is stoic in defeat.

Australian deals, present and future

The first half of the year for Australian M&A has been consistent with the narrative since the global financial crisis: good by global standards, but the locals are still disappointed.

The latest data from Dealogic on the first half of 2012 shows that Australian M&A reached $49.9 billion. That’s the third largest of all Asia-Pacific nations, but still down 33 per cent from the $74.8 billion the same time last year – which was also less than Aussie white collars were hoping for.

Dealogic says the decline has been largely due to a collapse in local dealmaking. According to the researchers, Australia saw 58 per cent less domestic deals, $16.8 billion worth, compared to last year.

If this doesn’t underline the importance of China, and foreign buyers generally, nothing will.

As investment bankers and advisers hope for equity markets to settle so corporate dealmaking can finally resume regular activities, Beulah Capital director and regular Eureka Report contributor Tom Elliott has given his assessment of Australia’s big takeover targets.

Here are three of his favourites from yesterday’s edition of Eureka Report that Breakfast Deals hasn’t touched upon enough recently.

Coca Cola: "When Lion Nathan made its unsuccessful bid for CCL three years ago, the Coca-Cola parent indicated it was not averse to a bid per se, just that any bidder had to be the right partner. Expect either the Japanese or Philippines giant San Miguel to have another crack.” "The company is highly profitable, dominates its competitors and exists in an industry relatively unaffected by overall economic circumstances (i.e. people still buy and sell cars in bad times as well as good). My expectation is that eventually one of the former old media titans will make a bid for CRZ in an effort to stay viable in the 21st century”.

GrainCorp: "GNC has wonderful monopoly style assets (e.g. grain silos on rail lines), strong relationships with its customers (i.e. farmers and buyers) and improved profitability given good rainfall in most of Australia’s grain growing areas. International players like Glencore and Agrium are leading a global charge for consolidation in this sector, meaning GNC is a likely target.”

Echo Entertainment, Crown, James Packer

There are two interesting angles to news that billionaire James Packer has assured regulators that he won’t seek more than 25 per cent of Echo Entertainment.

Both are explained in this morning’s edition of The Distillery, but we’ll give you the cliffs notes version here.

News that it took Perpetual seven months to secure support for an increase in its stake to 15 per cent from 10 per cent – since then it’s dropped below 5 per cent – highlights how long Packer might have to wait before winning similar approvals.

As Business Spectator’s Stephen Bartholomeusz writes, by making the NSW Independent Liquor and Gaming Authority and the Queensland Office of Liquor and Gaming aware he isn’t looking to take over the company entirely – just wrestle enough control without a takeover premium – it might speed things along.

However, representatives from Singapore’s Genting, controlled by rival billionaire KT Lim, have arrived in Australia just this week. Expectations are growing that Genting’s aims do not sit in line with those of Packer and that Lim is not strictly-speaking a Packer ally.

That doesn’t mean he’ll turn out to be an adversary, but unless Packer can count on Lim to not get in the way of achieving his own ends, securing regulatory approval ahead of his fellow gaming billionaire has to be a priority.

Qantas Airways, Qatar Airways

Qantas Airways has been revealed to be in discussions with Middle Eastern operator Qatar Airways about a possible strategic partnership as more whispers about a bid for the flying kangaroo emerge.

According to The Australian, Qatar chief executive Akbar al-Baker confirmed the talks yesterday in Perth.

The idea is that the two would enter a codeshare arrangement – that Breakfast Deals would dub the QA2 or Q-squared – whereby Qantas would be able to strengthen its European presence and Qatar would do the same in Australia.

"We have been meeting with Qantas for quite some time," al-Baker said, according to the newspaper.

Meanwhile, The Australian Financial Review understands that "a lot of work continues behind the scenes by a group of wealthy individuals” to make a bid for Qantas.

The newspaper says investment banker Mark Carnegie, who seriously played down the prospect of a Qantas offer due to the pain in credit markets, would likely be included in a syndicate bid.

Cardno, Marshall Miller and Associates, and EM-Assist

Infrastructure and environmental services company Cardno has continued its acquisition spree after collecting two US-based companies for a combined $US45.25 million ($43.3 million).

Cardno is now the proud owner of Virginian consultant firm Marshall Miller and Associates and California’s EM-Assist.

Amongst its list of clients, to which it provides a variety of services surrounding the evaluation and implementation of resources projects with an eye for sustainability, are BHP Billiton, Peabody Energy and ArcelorMittal.

To that list you can now add some of the biggest arms of the US army including the US Air Force and US Marine Corp, which EM-Assist has on the client list.

As Macquarie’s Cameron Pierce points out, these two purchases come on the back of quite a few others that have expanded Cardno’s footprint, including Roadtest, BEC, Lane Piper, Geotech Solutions, TEC, HRP and ATC Associates.

According to Deal Journal Australia, Cardno managing director Andrew Buckley says the company would be open to the tables being turned and a takeover offer being lodged in its direction.

"If someone came along and offered us a substantial premium, we'd listen but it doesn't mean we'd accept," Buckley told the publication.

Origin Energy

The prospect of an Origin Energy capital raising would only be put back on the agenda if it failed to sell a further stake in its Australia Pacific Liquefied Natural Gas (APLNG) project.

As Business Spectator’s Stephen Bartholomeusz explained yesterday, the economics of the project are pretty healthy. Failing to find a buyer is unlikely.

The last time an APLNG stake changed hands was in December, when Sinopec committed to taking a much larger allocation of the gas in exchange for an increase in its stake, to 25 per cent from 10 per cent.

Both Origin and joint venture partner ConocoPhillips want to lower their stakes in the project to 30 per cent from 37.5 per cent.

The question is whether Sinopec will step in again, or someone else will be sought out.

For his part, Origin chief executive Grant King is trying to keep his options open.

"We do believe there is potentially broader interest and that goes back to the nature of the resource … if you look at our resource position, it is still showing a resource position substantially greater than would be necessary to support just the two trains and the domestic market," King said yesterday.

Flinders Mines

Flinders Mines managing director Gary Sutherland is moving on from the bitter blow delivered by Elena Egorova, also known as the conjurer of Chelyabinsk.

The much-anticipated failure of its deal with Magnitogorsk Iron & Steel Works – thanks to the legal case brought against the proposal by the still unsighted Egorova – was just as widely expected to be followed by renewed efforts to secure a deal.

Sutherland had this to say yesterday: "Although it is disappointing MMK was not able to take steps to complete implementation of the scheme, due to the injunction issued by the Russian court, Flinders continues to be in a strong position to capitalise on what we believe is the most strategically located, independently held iron ore resource position in the Pilbara.

"We expect that there will be strong interest and multiple options available to Flinders to deliver strong value-accretive outcomes able to underpin the Pilbara iron ore project development path and we will move forward quickly in crystallising that interest into binding proposals."

Keep an eye on Fortescue Metals Group with this one.

David Jones, EB Private Equity

The corporate watchdog is reportedly deepening its investigation into the cancelled takeover offer for David Jones by the unlisted UK player EB Private Equity.

According to media reports, the Australian Securities and Investments Commission (ASIC) is understood to be asking for documents from brokers that traded David Jones stock during the hilarious period, and has some further questions for the PR firm Cannings Corporate Communications that apparently represented EB.

Much of the heat looks like it’s going to fall on ITG Australia, an institutional broker listed on the New York Stock Exchange, for it was behind the vast bulk of David Jones trades.

Meanwhile, The Australian reports that David Jones has asked Computershare to ask investors about their own exchanges.

Given that Breakfast Deals has been a little pointed in its criticism of EB chairman John Edgar, a Scot, for having an operation that struggles to be taken seriously, we thought it only right to balance the register with something from the colonies.

Without further ado, check out what Clive Palmer was wearing on ABC Lateline last night while selling his political credentials.

Wrap up

Blackmores chief executive Christine Holgate has spoken to Fairfax newspapers, telling them that the "80-year-old natural health company was now focused on organic growth” – try finding another 80-year old that’ll say that.

What the clearly much younger Holgate is of course referring to is the purchase of Sydney’s BioCeuticals, which has come under some criticism for the $40 million price tag.

"This is the first big acquisition Blackmores has done in many, many years...The whole vitamin category is growing somewhere around 6 per cent. It will continue to grow strongly because there's an increasing number of practitioners here and they're playing a greater part in the health agenda,'' Holgate told Fairfax.

On much less healthy matters, as many as 3500 investors have been left marooned after PPB Advisory was appointed as receiver of Provident Capital Limited.

Meanwhile, The Australian Financial Review says that the potential merger or sale of engineering consultant Sinclair Knight Merz is reaching the climax.

Greenhill Caliburn is said to be in "close negotiations” with three US players – two of which are apparently SAIC and Jacobs Engineering – after three months of investigations.

And finally, Whitehaven Coal has won compulsory acquisition of Coalworks after securing more than 90 per cent acceptances.

The main game of course is Nathan Tinkler’s growing plans for taking Whitehaven private. The Australian Financial Review says people close to the potential deal believe Tinkler is determined to push on. Apparently, another $500 million in financing could be needed.


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