BREAKFAST DEALS: Sovereign suitors

Sovereign wealth funds are expected to play an increasing role in Australian M&A, while Mariner's offers may have fallen over.

A new report says sovereign wealth funds and other not-so-traditional bidders will play an increasingly important role in Australian M&A when it comes to metals and mining. However, sellers need to better understand their limits. Mariner Corporation could be kissing both of its takeover plays goodbye in one go. Elsewhere, Commonwealth Bank of Australia is joining Westpac Banking Corp and Bendigo and Adelaide Bank back in the RMBS tent, while Inghams Enterprises has apparently set a date for investment banks to pitch floats.

Australian M&A Scoreboard

Sovereign wealth funds, particularly Chinese majors, are expected to play an growing role in rescuing Australia’s beaten down mining and metals M&A industry, according to a new report from Ernst & Young.

However, while the news is encouraging for a market that’s experienced one of its worst years in the last decade, buyers also need to check their expectations when it comes to price as market volatility has forced buyers to beware.

The E&Y report, which looked only at completed deals, shows that Australia booked $US15.7 billion worth in official handshakes in 2012, which is the lowest since global financial crisis year 2009.

Across the world, total completed deal values were down 36 per cent, of which 31 per cent was due to ‘non-traditional acquirers’ like state-owned enterprises. In 2011, that number was 21 per cent.

In Australia, E&Y data indicates that about 60 per cent of completed inbound deals activity for the metals and mining sector was from these non-traditional bidders.

Generally, the growing confidence of sovereign wealth funds and pension funds has been widely foreseen. In just the last few weeks we’ve heard numerous reports of the Canadian pension funds, of which we’re already very familiar, targeting Australia for greater exposure.

Chinese sovereign wealth funds are also thought to be interested in assets beyond Australia’s metals and mining industry. Agriculture is also thought to be on their list.

This is good news for the M&A sector that’s hoping 2013 will be better than 2012, but sellers need to be aware that lofty valuations might have to be reigned in if they want a deal.

E&Y cited Australian-listed, African-focused copper miner Discovery Metals as a case study of a ‘valuation gap’. Discovery of course recently watched Chinese private equity suitor Cathay Fortune, along with co-bidder China Africa Development Fund, walk away from an $830 million offer.

Discovery might rightly want to keep the focus on whether Cathay was ever really serious about its bid. Some Chinese bidders have either dragged out proposals to a ludicrous extent (Sichuan Hanlong Mining’s bid for Sundance Resources) or placed highly conditional proposals that can be easily exited (allegedly Cathay).

To be fair though, Chinese suitors aren’t the only bidders that stretch the rules. Just look at Mariner Corporation.

In any case, with so-called ‘non-traditional’ bidders set to play an increasing role in 2013, hopeful targets should reacquaint themselves with the dos and don’ts of how to get them on the line and into the board.

Wilson HTM, Mariner Corporation

Raider Mariner Corporation is reportedly expected to reveal this morning whether both of its takeover offers have fallen over in one go.

Yesterday, Mariner announced to the market that acceptances from streetwear company Globe International for its offer, a mere 27,032 shares out of 40.95 million, would be converted once final confirmations have been received.

Strangely, The Australian reports that Wilson HTM is close to securing victory on a technicality after Mariner apparently failed to send out the formal notices that extended its takeover offer until June 15.

Usually suitors extend their offers by weeks, not four months. Wilson HTM said it was considering legal action for what is clearly behaviour that’s not in the spirit of the Corporations Act.

"At the time of this announcement, (Wilson HTM) has not received a written response from Mariner, nor has Mariner provided an update to the ASX," Wilson said last night in a statement to the ASX – although, Breakfast Deals has checked the ASX and no statement appears to be there. Perhaps it’s to be released this morning.

"If the notice was not dispatched in accordance with the Corporations Act then, absent a court order to the contrary, the offer will have lapsed.”

Whatever the case, this isn’t the first time that Mariner’s conduct in takeover proceedings has demonstrated an apparent lack of understanding of the law.

Back in July, a heated exchange broke out between Mariner and its then-takeover target, stockbroker Austock.

The former had knocked back Mariner’s $14 million offer for a number of reasons, including the fact that the suitor did not make its offer subject to approval from Canberra, which is required before launching an offer under the Insurance Acquisitions and Takeovers Act 1991.

An Austock suitor would also need the approval of the Treasurer to take more than 15 per cent of its target, along with the Pooled Development Funds Board for more than 30 per cent.

None of this had apparently been secured. And Austock has rallied 70 per cent since Mariner withdrew its bid amid what it called a "blatant attempt” to block its advances. Such a blatant attempt to block a disorganised suitor apparently brings its rewards.

"There are many other opportunities for Mariner shareholders to pursue in the current market, and we believe it will be more productive for Mariner to turn its resources to pursuing those other opportunities,” the company said at the time.

How exactly did that work out? Perhaps we’ll find out for sure this morning.

Commonwealth Bank of Australia

Commonwealth Bank of Australia has lent further weight to the notion of a recovery in residential mortgage backed securities with a $750 million offer to follow rival Westpac Banking Corp and smaller competitor Bendigo and Adelaide Bank.

Commonwealth has tapped Citi and Macquarie, as well as its own internal desks, to promote the offer, which is widely expected to exceed the headline target.

Westpac Bank tried to place $500 million, which turned into $2.1 billion.

The Commonwealth Bank offer is roughly 80 basis points above the three-month bank rate, at least for the primary $400 million Class A-1 notes over two and a half years. Westpac’s was priced ever so slightly highly, but had a longer maturity.

Don’t be in the least surprised if the scale of this offer is ramped up significantly. Banks will often start small with fund-raising drives like this, particularly when they’re employing a financial instrument that’s gone through a quiet patch.

Wrapping up

Inghams Enterprises has reportedly told investment banks interested in getting a slot for a float that they have until the end of the month to put their case.

While the company hasn’t yet committed to an initial public offering for its chicken business, preferring instead for a simple trade sale, The Australian Financial Review reports that its dual-track process should come to a head soon.

Check out this morning’s edition of The Distillery for news about just how wrong capital raisings can go – it’s in relation to APN News & Media.

Meanwhile, Cadence Capital has released the prospectus for its $42 million capital raising, as Australian Renewable offers some more details on its own $8 million raising.

In other news, the Australian Competition and Consumer Commission says a decision on Telstra Corporation’s purchase of South Australian internet service provider Adam Internet is still weeks away, according to The Australian Financial Review.

And finally, News Corp – the parent company of this website – is talking to popular technology website AllThingsD about extending or ending their partnership, according to Reuters.

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