BREAKFAST DEALS: Perpetual, perchance?

Rumours circulate of another private equity play for Perpetual, while Seek's decision to ditch its capital raising raises eyebrows.

Retail, aviation, clothes manufacturing, cleaning services – that’s a list of some of the sectors private equity has shown some interest in over the last few months. Add wealth management to that list, specifically, Perpetual. Meanwhile, Nathan Tinkler has put a floor under the Whitehaven share price with his approach, securing his own net wealth in the process, for the moment at least. Also this morning, Seek’s decision to pull its raising needs some closer attention, plus Andrew Forrest’s Fortescue Metals Group looks destined for a spin-off listing in Hong Kong.

Perpetual

Wealth manager Perpetual could be the latest target of private equity, offering it a reprieve of sorts for rejecting a similar approach in 2010.

The Australian Financial Review believes that "at least one private equity firm is preparing an approach” for Perpetual as chief executive Geoff Lloyd gets ready to hand down his vision for the company following a strategic review over coming months.

The report indicates that one player is mulling over an offer of around $30, which would be a 38.6 per cent premium to yesterday’s closing price.

Shareholders might think back longingly to the days before the global financial crisis when the stock was topping $80. They’d even think grudgingly back to the $38 to $40 a share offer that Kohlberg Kravis Roberts put on the table back in 2010. The offer was, for many now regretfully, rejected.

There should be a thematic similarity between Lloyd’s blueprint for the company and any takeover attempt by private equity, should one eventuate – slim it down.

There’s broad agreement that Perpetual’s cost-base (headcount) is too big and it will need to reduce it (fire people) with whatever plan Lloyd can muster to secure the company’s long-term future.

A private equity bidder would have a similar plan in mind, plus some asset sales. With the stock languishing at almost half the offer price from KKR, it’ll be interesting to see (if a deal eventuates) what the shareholder base, particularly the large number of retail buyers, thinks of a bid at $30.

Whitehaven Coal, Aston Resources

The legend of Nathan ‘Deal Maker’ Tinkler has been well served by this latest episode.

The coal tycoon, through his company The Tinkler Group, has lobbed a "highly conditional and incomplete” offer to privatise Whitehaven Coal just six weeks after selling Aston Resources into it for a 20 per cent stake.

The reaction from the market – as highlighted in this morning’s edition of The Distillery – lies somewhere between intrigue and incredulity.

Whitehaven is taking the possibility of a more complete deal emerging down the track seriously and has formed an independent committee to consider anything else the multiple Newcastle sporting club owner might throw up, with the help of a consortium. Grant Samuel Corporate Finance and Corrs Chambers Westgarth are advising Whitehaven, while Tinkler will be talking with UBS.

Any consortium that Tinkler can assemble is likely to include players from Asia; Japan’s Idemitsu is the most obvious. The Tokyo-based company shares one half of a joint venture with Whitehaven and fully owns a mine that neighbours Whitehaven’s Maules Creek.

While Whitehaven’s share price has sunk to $4.18 since the Aston deal was done, bringing Tinkler’s net worth down with it, analysts have an average share price target for Whitehaven of $6.27. As such, any offer from Tinkler that’s significantly lower than that will probably be rejected.

However, The Australian reports comments from one unnamed analyst that emphasises the dealmaking credentials of Whitehaven managing director Tony Haggarty.

The analyst points out that Haggarty would be considering an "end game” scenario because a number of his company’s backers need to cash out.

There’s a deal to be done here if the right players can be mustered. But if one doesn’t eventuate, it puts a floor under the falling Whitehaven share price for a while as Tinkler considers his next move, or extracts a rival offer from the market.

Seek

Questions are being asked about Seek’s decision to pull its planned $125 million subordinated notes issue. The narrative was that Europe’s jitters have inspired companies that can raise capital to do so while they can.

"Seek was not satisfied that it would achieve acceptable terms at this point in time and believes it is not in the best interests of shareholders to proceed,” the company said in a statement to the market.

Judge for yourself, but that quite vague statement sounds like market volatility is the culprit in Seek's eyes. It certainly doesn’t sound like it’s suddenly realised that it doesn’t need capital at all – although the company emphasises that it is well capitalised.

Remember, if Seek is pulling the issue because of market volatility, it could have drastic implications for other companies thinking about raising capital ahead of a potential credit market shutdown.

This sounds a little premature, but there is another explanation as to why "favourable terms” might have been out of Seek’s reach.

According to The Australian Financial Review, word is floating around financial circles that Commonwealth Bank of Australia and National Australia Bank held up their end of the sales process for the offer. The same apparently cannot be said for Goldman Sachs.

The newspaper indicates that Seek might have even filled $85 million of the $125 million issue. The problem is if the company reduces the size of the offer, the market will perceive it as a failure, which dents confidence in the company.

If the share price drops, investors have to pay a higher price for an equity raising if it comes to that. No one is suggesting that such a move is on the cards at all, but it does illustrate the penalties for cocking up a subordinated notes issue.

Better to pull the proposal entirely with a vaguely worded statement and reassuring words about the company’s capital position.

Echo Entertainment, Macquarie Group, Crown, James Packer

Echo Entertainment is now seriously tipped to release the details of its capital raising, after expectations that the drop would happen yesterday went unmet.

Media reports indicate that Echo will raise $450 million with a renounceable rights issue at a discount of between 22 and 26 per cent.

A case could be made that that discount is too severe, given the overtures that billionaire James Packer has made about missed value opportunities. But the takeover speculation surrounding the company has strengthened the share price, giving new chairman John O’Neill more room to move on the capital raising front.

While Echo didn’t release the details of its capital raising yesterday as widely expected, shareholders were hardly left disappointed.

News that Macquarie Group, through its various arms, had built a stake in Echo of 5.1 per cent really added further weight to the notion that a deal could be done here. A similar, earlier move by Singapore’s Genting, led by gaming tycoon KT Lim, provided enough inspiration for the imagination of shareholders.

It feels unlikely that Macquarie has built the stake for its own sake. The far more likely scenario is that the investment bank is holding the shares on behalf of hedge funds.

But the idea that hedge funds, and not Macquarie specifically, are interested in Echo stock is hardly a less exciting story for shareholders.

NSW privatisation

NSW Treasurer Mike Baird is set to receive a message from the nation’s top competition watchdog Rod Sims to break Macquarie Generation apart for its privatisation.

The Australian Competition and Consumer Commission chairman will make the comments to a business lunch today, according to The Australian. Sims’ call will come just two days after NSW handed down its budget with key proposals including the sale of its electricity assets, which covers Macquarie Generation, as well as Port Botany and the Cobbra coal mine.

Sims will warn NSW not to sacrifice long-term structural needs of the electricity sector for maximum gain during the sale process.

The ACCC has made it clear that it holds concerns for the Australian electricity market. While the competition regulator waved through AGL Energy’s purchase of the Loy Yang A power plant, future deals won’t be as easy to secure.

Fortescue Metals Group, Baosteel

Andrew Forrest’s Fortescue Metals Group has inked a magnetite spinout deal with Chinese giant Baosteel, increasing expectations that a listing on the Hong Kong Stock Exchange is not far away.

Fortescue has already been coy about a subsidiary listing, saying it’s one of several options. But yesterday’s announcement that the two companies would create FMG Iron Bridge to be based out of Hong Kong did the speculators a few favours.

Fortescue will hold 88 per cent of the new vehicle in the beginning. FMG Iron Bridge will take over the Glacier Valley magnetite tenement, which is 65 per cent owned by Fortescue and 35 per cent with Baosteel. It will also assume control of Fortescue’s fully-owned Northstar tenement.

Wrapping up

Alesco Corporation shareholders are lending their support to the board for rebuffing the advances of paints company DuluxGroup.

At the centre of their objections to the $188 million offer is the company’s balance sheet is in good shape, so any recovery in the housing market will be a boom for the garage door company.

In resources, two Eureka Energy shareholders have changed their mind and recommended that shareholders get behind the $108 million takeover offer from Aurora Oil & Gas. That makes three out of three; Aurora is holding aces.

Meanwhile in media, the subject of yesterday’s Breakfast Deals feature, The Australian Financial Review believes that Ten Network and CHAMP Private Equity’s oOh!media are still quite a way off securing a deal for outdoor advertising company EYE Corp, despite four weeks of exclusive due diligence.

The newspaper says that price is not being discussed at this point. Ten is hoping to get up to $150 million from the sale.

And Warrnambool Cheese & Butter could attract some takeover attention once again after a shock earnings downgrade. The last time that happened, Murray Goulburn picked up 12 per cent in the company as part of an unsuccessful takeover attempt.

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