Depending on your perspective, Insurance Australia Group and Wesfarmers can be considered prime examples of what happens when takeovers go wrong. IAG’s share price has struggled since rebuffing QBE’s Frank O’Halloran, while Wesfarmers boss Richard Goyder famously came under enormous pressure after saddling the WA-based conglomerate with an enormous debt burden to buy Coles – more than it was worth – just before the GFC. You’d have to argue that Goyder’s decision is looking better and better by the day, but speculation has emerged that Wesfarmers is having a look at IAG. If it’s true, has either company learnt from the past? Meanwhile, it appears increasingly likely that Nine Entertainment will end up in the hands of its bankers just like Kerry Stokes foretold, with the latest CVC Asia Pacific debt deal getting another cold reception. Elsewhere, Qantas Airways says its Kuala Lumpur plans are still alive despite new moves from Malaysia Airlines, a TPG Telecom-iiNet merger has a new champion and Austar is getting its papers in order for a Foxtel merger.
Insurance Australia Group, Wesfarmers
Something’s going on with Insurance Australia Group, that’s for sure. Since the end of trading on November 30 the insurer has shot up 10.5 per cent, well ahead of the market, which has added a still impressive 3.9 per cent. IAG’s rally can’t be explained by a broad rally for the insurance sector – QBE is just ahead of the market, up 4.4 per cent, while Suncorp-Metway is running slightly behind with a bump of 3 per cent. So why is IAG so special? Well, speculation has broken out that Wesfarmers is considering a run at the predominantly east-coast insurance company to complement its west-coast operations. Media reports indicate that a company spokesperson has dismissed any knowledge of a deal – it’s not quite a denial, but it’s certainly not a confirmation.
Be that as it may, what can we make of this speculation? Richard Goyder’s commitment to insurance is questionable, given his company’s Lumley business was said to be up for sale a few years ago. While the Coles acquisition is slowly paying off, it cost the company $22 billion and gave it an unfavourable return-on-equity comparison with Woolworths as a result of the share issue. IAG has a market cap of $6.6 billion and even if you were to add a modest takeover premium of 20 per cent to its trading price before this rally emerged, Wesfarmers would still be looking at a takeover in the order of $7.2 billion, just about what QBE’s Frank O’Halloran was willing to pay.
Given that a showdown with Woolworths over hardware retail is just getting started, which threatens the Bunnings cash cow, is now the time for Goyder to be moving into insurance? Then again, if it was to be a scrip and cash deal, now might be as good as it gets for Wesfarmers. Before the IAG surge, the Western Australian-based conglomerate was ahead by almost 30 per cent for 2011. Does timing get any better?
Nine Entertainment, CVC Asia Pacific
Last month’s prediction from Seven Group billionaire Kerry Stokes that rival Nine Entertainment would be in the hands of bankers within a year might come true quicker than even he’d expected. According to media reports, a second debt refinancing proposal from the network’s private equity owners, CVC Asia Pacific, for $2.7 billion of its $3.6 billion of debt has again met a poor reception. It’s thought that Oaktree Capital and Apollo Global – the holders of around 50 per cent of that $2.7 billion of debt – are not likely to support the new proposal, having been on a buying spree recently.
Further to that, the Australian Financial Review reports that the recent deal struck between CVC and Goldman Sachs – set to convert almost $1 billion in other debts into equity – could be jeopardised if this proposal with the hedge funds can’t be remedied. The paper says that creditors have two weeks to sign up to the latest deal.
But before that happens, attention is turning back to Stokes. Speculation is rampant that he is behind the larger than usual trading in Ten Network shares in the lead-up to its annual general meeting, which is set to be Lachlan Murdoch’s last in the chief executive’s seat.
Qantas Airways boss Alan Joyce is reportedly still committed to an ultra-premium airline in Asia, possibly with Malaysia Airlines, despite the potential partner establishing short-haul premium services. Malaysia Airlines also plans to get rid of loss-making routes and spin-off ancillary businesses, with some officials indicating that up to 40 per cent of its footprint isn’t making a dollar. But Malaysia’s plans throw up some questions for Qantas, which is hoping to set up a medium-haul operation in Asia, possibly out of Malaysia Airlines’ base in Kuala Lumpur.
But according to the Sydney Morning Herald, Qantas believes its plans are still reconcilable with the Malaysia Airlines announcement, because one is for short trips and the other is for medium trips. Meanwhile, Qantas’ low-cost carrier Jetstar has had to fend off suggestions that its currently unprofitable joint-venture with the Vietnamese State Capital Investment Corporation – the country’s state-owned fund – is going to merge with Vietnam Airlines. However, Jetstar boss Bruce Buchanan said a partnership with Vietnam Airlines would be welcome and while the statement from the company said no agreement had been "formalised,” it did not directly dismiss the suggestion that talks had taken place.
TPG Telecom, iiNet
TPG Telecom mightn’t be making too much of a fuss about its 7.24 per cent shareholding in rival ISP iiNet, with boss David Teoh maintaining it’s just a "strategic” investment, but a tie-up between the two companies has received yet another endorsement. According to media reports, Goldman Sachs analysts have recognised that a deal would make sense over the long-run for the two companies, with the national broadband network increasing pressure on companies to enhance scale.
Consolidation in the sector is already taking place and is expected to continue. TPG picked up Pipe Networks for $373 million in 2010, while iiNet has picked up AAPT from Telecom New Zealand for $60 million and has entered into a binding agreement to purchase Canberra ISP transACT for $60 million.
Austar United Communications, Foxtel
Austar United Communications is set to seek court approval for a shareholder meeting to approve the Foxtel merger, The Australian reports. According to the newspaper, the documents will be formally lodged by the end of today. Such a move might have seemed presumptuous a few weeks ago, but since the Australian Competition and Consumer Commission lost its appeal against the Metcash takeover of Franklins, which included a judgement casting doubt on the consumer watchdog’s ability to oppose certain deals, the feeling has been that the Foxtel-Austar deal has a better chance of getting up.
The Australian Competition and Consumer Commission has sought to allow coal miners to collectively bargain with rail provider QR National for access to its infrastructure on the Newlands, Blackwater and Goonyella rail systems. The players involved are the big ones you’d expect – Rio Tinto, Peabody Energy, New Hope Corporation, Carabella Resources and Middlemount Coal.
Elsewhere in coal, Nathan Tinkler has successfully boosted the infrastructure allocations for Aston Resources, as his company negotiates with Whitehaven Coal over a potential merger of equals. Whether this will impact valuations remains unclear, but right now Aston has another 3.5 million tonnes set for coal terminal operator Port Waratah Coal Services. Meanwhile, Endocoal has indicated that it has received a non-binding indicative proposal worth 60 cents a share, which would value the company at about $67 million. The company says it has received a number of offers recently and Grant Samuel has been sought to be its strategic adviser.
Elsewhere in resources, oil and gas producer AWE has sold down an 11.25 per cent stake in the Yolla gas and condensate field, and a 2.75 per cent stake in another Tasmanian Bass Basin interest to Japan’s Toyota Tsusho. The company will collect $80.1 million and the proceeds will be used to strengthen the balance sheet.
And finally, Fletcher Jones administrator Cor Cordis will be putting ads in today’s newspapers for the fallen retailer that boasts 240 staff and 45 shops across the country. Cor Cordis partner Bruno Secatore says the Christmas period is looking solid for the retailer but with the Productivity Commission’s report on the industry expected to be delayed due to a lack of good news, buyers should beware.