BREAKFAST DEALS: Rio foiled?

Rio finds the obstacles to aluminium asset sales growing, while Brambles' Recall business attracts attention.

In the past week, a global oversupply of aluminium and rising electricity costs have underlined the challenges ahead for Rio Tinto as it seeks to float Pacific Aluminium or palm it off through a trade sale. Now it’s time for the Australian dollar to frustrate the mining giant. Rio might have to take its time in order to get a good price for these assets. Speaking of which, time is what Brambles has on its side to sell its US document management business, Recall, and it’s showing in the valuations. Meanwhile, analysts are starting to place a much higher value on Pacific Brands than the original $600 million figure that was kicked around, Extract Resources has won a crucial tick from the Namibian government that should ensure a bid from China Guangdong Nuclear becomes reality and South Africa’s Exxaro is hoping to avoid a showdown with one of African Iron’s major shareholders.

Rio Tinto, Pacific Aluminium

All the obstacles that Rio Tinto faces in offloading its unwanted aluminium assets in Pacific Aluminium are well known, but they’ve all been further reinforced just this week. Higher electricity costs combined with lower global demand have brought about the situation where Rio might be forced to close its Sebree smelter in the US state of Kentucky, on the back of a decision to shut down the Lynemouth smelter in the UK due to steep power bills and a lack of interest.

Now, the higher Australian dollar has come into play. Global aluminium company Norsk Hydro, based in Norway, says the higher Australian currency and lower global demand has forced it to reduce production at its Kurri Kurri plant in Newcastle. This isn’t a good sign for the nearby Tomago smelter, where Rio plans to cut 100 jobs, although as yet the miner has said it will keep the site running at full capacity.

Rio is hoping to jettison Pacific Aluminium through a trade sale or initial public offering, but the Norsk Hydro move simply reminds the market of just how badly the Australian miner must want to offload burdensome aluminium assets. Further, it increases the chance that CSR will be keen to get rid of its 25 per cent stake in Tomago, which is held through its 70 per cent holding in Gove Aluminium Finance.

Brambles, Recall

Australian pallet maker Brambles has reportedly received first offers for its US document management business, Recall, and it looks like initial estimates of a $US2 billion ($1.94 billion) sale were well within reason. Carlyle Group and Apollo Global Management are two of four bidders to submit first offers that have been short-listed, according to Reuters. It’s been reported that Brambles has an internal target of $US2.2 billion and given that it’s not been pressured into selling the business, the world’s largest pallet company can sweat the buyers for a good price. If Brambles don’t get it, they don’t have to sell Recall now.

Pacific Brands, Kohlberg Kravis Roberts

It was initially reported that Pacific Brands could expect to get an offer north of $600 million from private equity suitor Kohlberg Kravis Roberts – and analysts seem to agree. According to media reports, Credit Suisse analyst Grant Saligari believes that KKR could pay up to 80 cents a share for the clothing company, giving it a market valuation of $730 million, and then cut underperforming brands once it seized control to make the numbers work. According to The Australian, Citi analyst Craig Woolford says PacBrands could be worth as much as 95 cents a share.

Extract Resources, Guangdong Nuclear

Extract Resources is a step closer to China. The Perth-based, Namibia-focused uranium hopeful told the market that the Namibian competition authority has approved a possible takeover of Extract by China Guangdong Nuclear Power Corp. Guangdong is bidding for Kalahari Minerals, based in the UK, which holds a 43 per cent stake in Extract and approval from the Namibian competition leaders is one of the conditions.

Australian takeover laws dictate that Guangdong must bid for Extract if it wins more than 50 per cent of Kalahari. Extract told the market that a bid must be lodged with Extract within four weeks of Guangdong picking up a majority of Kalahari. With a £632 million ($949 million) bid for Kalahari, Extract would theoretically get an $8.65 bid. This would value the Perth company at about $2.2 billion.

The real target is the Husab uranium project, thought to be one of the largest deposits in the world. But there’s still some haggling to be done. The Namibian government has indicated that it would like to buy a 10 per cent stake in the mine and Guangdong if the deal goes through. Then there’s Rio Tinto, which holds 14 per cent of Extract and 11 per cent of Kalahari, and owns the maturing Rossing uranium mine next door to Husab. Extract has dismissed the notion that Rio has a play here – brave words.

African Iron, Exxaro

While we’re in Africa, it turns out those reports that Australian-listed African Iron was about to receive a bid from South Africa’s Exxaro turned out to be correct. African Iron owns 92 per cent of the Mayoko-Lekoumou iron ore project in the Republic of the Congo, and Exxaro wants it. The South African company has put 51 cents a share on the table for African Iron, a 27.5 per cent premium to its previous trading price, which values the company at $338 million.

But with the share price sitting at 56 cents a share, what are the speculators up to? Tony Sage’s Cape Lambert, which holds 25.25 per cent of the target, has put itself down for a pre-bid agreement to accept the bid for 19.99 per cent. That’s a good start, but is another bidder in the mix to justify the higher share price? It turns out that ASX-listed Equatorial Resources has just short of 20 per cent of African Iron. Exxaro has a minimum acceptance condition of 75 per cent, meaning Equatorial doesn’t have a blocking stake, but probably has enough to encourage some negotiations. Of course, if they play too much hard ball, Exxaro could simply drop that condition to gain control and then the speculators are left high and dry.

Spotless Group, Pacific Equity Partners

Spotless Group chairman Peter Smedley has revealed just how poorly his $2.80 price target for board recommendation and due diligence was received by the service company’s suitor Pacific Equity Partners. Spotless told the market that it has "received correspondence” from the private equity suitor showing that it wants both of those things at its $2.56 cash bid, which values the company at $711 million. Spotless passed on the conclusion from PEP that there was "nothing” in the management presentation offered to the private equity firm – and released to shareholders in an act of transparency universally well received – that would justify a value above $2.68.

The third demand from Smedley is that PEP demonstrate that it has the funding in place for the bid. "These are tough times and one would want to be sure (that a bidder) had the ability to fund (a bid),” Smedley said, according to The Australian.

As Business Spectator’s Stephen Bartholomeusz points out, there are three ways this can end.

Wrapping up

First it was Sucrogen, then Proserpine Sugar Mill and Maryborough Sugar – who’s next? The sugar industry’s lobby group Canegrowers has told News Limited what the rest of the market already knows, that Mackay Sugar is next in line. But Ron Mullins added something else to the discussion, saying that foreign players might try and purchase the already foreign-owned Bundaberg Sugar.

Meanwhile, now that Murchison Metals has the environmental approvals for the Jack Hills mine and the $325 million deal to transfer its 50 per cent stake in the site, as well as the Oakajee Port and Rail project, seems all but assured ahead of the shareholder meeting on February 13, there’s one question to be asked. What next? Chief executive Greg Martin has told The Australian that Murchison has received a number of offers to purchase assets with the proceeds of the to-be-completed sale and expects more to come. Martin must be feeling confident that the sale will go through if he’s entertaining questions about how the money might be spent.

And finally, turning back to the mega-acquisition of 2011… Foster’s Group. Executives from the Australian brewer’s new owner SABMiller are currently making themselves at home at the company’s Melbourne headquarters, while the head office has just raised a massive $US7 billion ($6.8 billion) on the US bond market to pay for it.