BREAKFAST DEALS: Painful Discovery

Discovery Metals finds itself an increasingly vulnerable target, while Westpac begins a hybrid notes drive.

Discovery Metals shares had the rug pulled out from under them… again. Chinese private equity suitor Cathay Fortune is pushing for due diligence and the copper mining target doesn’t have a lot in the trunk to resist. Westpac Bank has kicked off the hybrid drive for 2013; who knows what’s to come. Meanwhile, talk is already underway about what Mark Carnegie’s next target will be, GrainCorp’s suitor might have brought in a partner of sorts and the IPO market in 2013 is off to an even worse start than 2012, according to the latest research.

Discovery Metals, Cathay Fortune Corporation

Discovery Metals shares were smashed yesterday to the tune of 13.1 per cent after Chinese private equity suitor Cathay Fortune Corporation extended the timeline of its $830 million takeover proposal.

Cathay Fortune, bidding in conjunction with China Africa Development Fund, said in its fifth supplementary bidder’s statement that the extension to February 15 would allow it time to discuss with Discovery access to due diligence.

The share price finished yesterday’s session at $1.13, a staggeringly worrying 34 per cent discount to the $1.70 offer price.

The sudden deterioration in Discovery’s share price from $1.65 in early January to current levels is indicative of the rapid power shift in this takeover tussle.

Armed with a favourable independent expert’s report, the African-focused copper miner knocked Cathay back at $1.70 a share.

But this was followed up by problems at its flagship Boseto project in Botswana, including higher than expected cash costs, lower than expected sulphide ore in the Zeta open pit mine and a pit wall failure at the same site.

As such, Discovery has gone from the recipient of a possibly opportunistic play to a vulnerable target much in need to assuaging its suitor.

Granting due diligence looks to be unavoidable.

Westpac Bank hybrid issue

Westpac Banking Corporation has launched the hybrid issue drive in 2012 with a $500 million offering.

The margin is expected to come in somewhere between 3.2 per cent and 3.4 per cent, which is broadly in line with Westpac’s last offer at 3.3 per cent.

The Westpac Capital Notes are fully paid, non-cumulative, convertible and redeemable. They will also qualify as tier-1 capital under Basel 3 rules.

Hybrids proved to be particularly popular last year for Australian corporates as they searched for alternative fundraising measures. The banks found them particularly useful.

Whether this proves to be the beginning of yet another wave of hybrid issues in Australia in 2013 is difficult to tell conclusively, but you’ve got to acknowledge that the swiftness with which Westpac has followed up one hybrid issue with another is a telling sign.

The offer is tipped to begin on February 7.

Fairfax Media, Mark Carnegie

The departure of venture capitalist Mark Carnegie and his posse activist investors from the Qantas Airways register – which hasn’t been confirmed, mind you – has already got the market thinking about what could be the next target.

All eyes are centring on Fairfax Media.

This speculation isn’t new. The same line was being pushed around in late November last year courtesy of an apparent conversation between Carnegie, adman John Singleton and former Fairfax chairman Ron Walker.

This morning, The Australian Financial Review reports that sources close to the activist group have been looking closely at whether a break-up play for the media company would be feasible.

But the situation is arguably less favourable than the Qantas play. Since the initial speculation emerged, Fairfax has sold down its stake in New Zealand trading website Trade Me, hands down its best asset.

Shareholders that have been campaigning for some value-releasing proposals, like 14.9 per cent shareholder and billionaire Gina Rinehart, were well satisfied with the Trade Me sale.

The obvious play for the activists would be for Carnegie and Singleton to restart their tilt for the company’s radio assets, having failed to get the assets previously on account of what was reported to be unsatisfying financing arrangements.

But again, talk about putting the horse before the cart. We need something to actually happen first.

GrainCorp, Archer Daniels Midland

GrainCorp suitor Archer Daniels Midland has its second quarter results coming up on Tuesday and The Australian Financial Review understands that the US giant could be prepared to bring in Cargill to take the target’s 60 per cent stake in flour joint venture Allied Mills.

Hopefully we’ll get some more word from ADM on where it thinks the play sits with GrainCorp. Since early January, GrainCorp shares have slumped below the $12.20 offer price. It’s been a little hot this month.

IPO Watch

Hopes of a resurgence in initial public offerings in 2013 have been dashed by new research that suggests the beginning of the new year has been even worse than the beginning of the last.

HLB Mann Judd’s 2013 IPO Watch report found that 43 junior stocks, which have been all the IPO scene has really offered since 2008, debuted on the Australian Securities Exchange last year, down from 92 in 2011.

The really worrying thing is that just 14 companies are planning to list on the ASX at the moment, according to the survey. This time last year, that numbers was 26.

HLB Mann Judd partner Norman Neill said it’s the quietest we’ve seen the IPO market for a long time.

"We were sitting here this time last year feeling relatively confident with what was in the pipeline, and what people were talking to us about,” Neill said.

"We're certainly not having as many of those discussions 12 months later.”

And while we’re talking small planned IPOs, small oil play Swala Energy is looking to raise up to $13 million from the market to drive a drilling campaign in Tanzania and Kenya, according to The Australian.

Swala Energy is run by a bunch of former Woodside Petroleum executives.

Wrapping up

Industry Funds Management is considering exercising its pre-emptive rights over Melbourne Airport as part of the Future Fund’s $2 billion bid for Australian Infrastructure Fund’s aviation assets, according to The Australian Financial Review.

The Australian has previously indicated that IFM is thinking about doing the same for the Northern Territory Airport group assets, which have been arguably undervalued in the AIX deal. That’s an easy play.

But if the AFR report is correct, IFM is thinking about paying a 15 per cent premium to keep the Future Fund out of Tullamarine.

Meanwhile, retailer Myer has backed off its from its legal challenge to David Jones over designed Kimberley Ellery that could have stuffed up its fashion week campaign, according to Fairfax.

However, the report also indicates that Myer will still pursue the designer behind Ellery Land for damages.

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