BREAKFAST DEALS: Pacific solution?

KKR appears ready to make a play for Pacific Brands, while Spotless threatens to spurn its suitor.

Kohlberg Kravis Roberts has nicked some of the attention from Pacific Equity Partners this morning with a report that it’s considering a bid for Pacific Brands. This illustrates two points – firstly, the extent to which private equity is back in the M&A game, and secondly that Australian retail is in trouble and vulnerable to opportunists. Spotless Group chairman Peter Smedley has shown PEP what his target price is. It’s short of the $3 he’s reportedly had in mind in the past, but it could still be too much for PEP. Elsewhere, Rio Tinto might have to close yet another smelter, this time in the US, which makes the task of reducing its aluminium footprint easier but far from lucrative. Finally, CSG Limited is reportedly considering reaching out to potential suitors in the wake of failed talks with NEC and, to complete the private equity party, a player could be looking at Onsite Rental Group.

Pacific Brands, Kohlberg Kravis Roberts

Pacific Brands is reportedly in preliminary discussions with US private equity heavyweight Kohlberg Kravis Roberts about a possible transaction tipped to be worth around $600 million. The Australian Financial Review understands that KKR wrote to Pacific Brands sometime before Christmas and the two companies have been in early discussions since then.

Pacific Brands currently has a market cap of $521 million at a share price of 56 cents. Using the price mentioned in the report as a guide, that would translate to a bid price of 65.7 cents. There’s no guarantee that the talks will produce a formal proposal, so it’s very early days. But expect a bump in the Pacific Brands share price.

The case for Pacific Brands to re-enter private ownership is compelling. The Australian retail sector might have achieved encouraging Boxing Day sales, but it was at the expense of a paltry return in the preceding months. After a year in which the company’s share price dropped 43 per cent, 2012 is a year where market volatility could reap yet more havoc when Pacific Brands needs to restructure. Pacific Brands was floated by private equity player CVC Asia Pacific in 2004.

Spotless Group, Pacific Equity Partners

Spotless Group chairman Peter Smedley already knows what it’s like to suddenly be left without a dance partner and would be acutely aware that it might be about to happen again. Spotless told private equity suitor Pacific Equity Partners yesterday that the current $711 million offer, at $2.68 per share in cash, would have to increase to $743 million, or $2.80 per share, for unanimous board support and the data it needs to complete due diligence.

But that could be the last straw for PEP. The Australian brings word from sources that not only has PEP turned up its nose at the Spotless demands, but it is also considering walking away from the deal entirely. Of course, this would not be the first time Smedley has waved goodbye to a bidder. In May last year private equity player Blackstone Group walked away from a $657 million proposal after Spotless declined to engage. While the much higher PEP offer vindicates Smedley’s decision not to take Blackstone’s advances too seriously, managing an increasingly vocal register of shareholders calling for the books to be opened will be challenging.

Rio Tinto

Rio Tinto is facing an increasingly complicated path to purge itself of unwanted aluminium assets. Rio has ring-fenced Pacific Aluminium and its 13 "non-core assets” for the purpose of ultimately offloading them. But the aluminium market is tight and the miner was forced to announce the closure of the Lynemouth smelter in the UK last November due to higher electricity costs with no buyers in sight. That fate looks like it could be repeated.

According to the Evansville Courier & Press, a newspaper serving readers in Indiana, Illinois and the state where Rio Tinto Alcan’s Sebree smelter resides, Kentucky, a likely increase in electricity costs could threaten the plant entirely. Rio claims that the average global smelter pays a power cost of $26 per megawatt, while the typical US smelter pays $28. But the Sebree plant is headed for something north of $50. "Seventy-five per cent of US smelters have lower power costs,” the Evansville Courier quotes Rio Tinto Alcan’s Pam Schneider as saying at a recent conference. "We have to find a solution. We won’t survive with power costs that are twice the world market.” Another closure perhaps?

CSG Limited

CSG Limited shareholders could be in for a reprieve in the wake of failed talks with NEC that sent the company's share price down 40 per cent when they broke down. According to the AFR, it’s understood that US security giant Lockheed Martin has halted preliminary talks with the Australian IT and printing company, although price was not on the agenda, and private equity firms have also expressed some interest. The newspaper said CSG might be poised to engage with suitors once again after the talks with NEC collapsed due to concerns about Europe, which saw a $339 million proposal disappear.

Onsite Rental, Quadrant Private Equity

As if the action at Pacific Brands and Spotless Group wasn’t enough, private equity players could be about to switch ownership on the Australian equipment hire company Onsite Rental Group. The AFR brings word that Quadrant Private Equity and an unnamed co-investor are thinking about kicking Onsite’s tyres, which is currently 60 per cent owned by Next Capital, another private equity player.

Wrapping up

Centro Retail Australia may have emerged from the shadows of the Centro Group mess, but some investors were hoping that it would promptly skip into the arms of a suitor. According to the AFR, Deutsche Bank believes that the installation of seasoned property player Steven Sewell as chief executive sets the company up for stability, not takeovers.

Elsewhere, two months after tapping the market for $22 million, Aurora Algae is coming back with another $100 million raising from private investors. The algae harvesting and processing company, based in Western Australia, is expecting to go into production in early 2013 and a bit of extra cash will do it some good.

Turning to resources of a different kind, The Australian reports Riversdale Resources has picked up 45 square kilometres of land in the Alaska Mat-Su Valley from the Alaska Mental Health Trust Authority. Riversdale beat off Usibelli Coal Mine, Alaska Mining and Energy, and Arctic Coal for the win. Meanwhile, Resource and Investment NL is set to become a bona fide Australian gold producer with the $35 million acquisition of Grosvenor Gold, which owns the Fortnum gold project in WA, from BlueCrest Mercantile Master Fund.

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