Buckle in for some takeover action

PORTFOLIO POINT: Expect plenty of takeover action in resources, infrastructure and property this year.
Before kicking off our first Takeover Diary for the year I thought I'd offer a brief summary of what might lie ahead in the takeover arena in 2009:

Bidders will still have the whip hand this year, but certain sectors will still attract takeover action in 2009. The decision by BHP Billiton to walk away from its Rio Tinto bid meant that in 2008 the value of failed bids was higher than the bids that went ahead. Still, last year’s woes will give way to the boom M&A sectors for 2008: the bombed-out sectors of infrastructure, property, and resources will probably see a lot of attention, as will consumer staples such as beverages groups, major retailers and some of the mid-tier banks.

Earlier today we heard reports that China's Shenhua energy group is going to bid for Rio's 76% stake in Coal & Allied. It's a sign that there’ll be plenty of takeover activity, but I don’t think there will be much counter-bidding. Private equity will probably make a comeback this year, and the hedge funds that survived 2008 are now working in some attractive conditions.

The big risk of course is still deals failing, and 2008 demonstrated that you have to be very careful about what deals you go into. Our guide is that if it’s just talk, an inconclusive bid or an offer that’s not formally a bid, it’s best to stay away from it at the moment.

We’ve already started to see some action in the infrastructure field, with some of the long-term infrastructure funds such as CP2 taking big stakes, for example, in ConnectEast. We’ve seen the infrastructure stocks themselves desperately trying to pay down debt or raise extra capital.

I think a lot of infrastructure assets will change hands. The same goes for property. Some property trusts are very over-geared, and are still yet to undertake the big write-downs that still have to happen.

The reality is once transactions occur, including forced transactions, various property funds are going to be forced to write down their holdings, and that’s under new accounting provisions; they can’t just hold things at cost forever. If the market is a lot lower, they have to tack that on their balance sheet. That again will put pressure on property fund balance sheets and some of them will be forced to sell assets and some will become takeover targets.

The structure of ownership in listed property is changing rapidly: Stockland took a stake in GPT Group. Lend Lease has taken control of what was called Babcock & Brown Communities; it’s now called Lend Lease Prime Life. The assets are quite good, but they grow through different sorts of ownership until they end up in the hand of the right owner.

Resources is the next big sector. The resources sector has been pummelled harder and faster than just about anything since the dotcom crash of 2000. Now, again, if you look at the case of, for instance, OZ Minerals, which is desperately trying to work out a restructure plan with its banks. It may be forced to sell some of its prized assets, such as Prominent Hill in Australia, or some of its overseas assets. You will see more corporate activity, some of which will be takeovers, but if the OZ Minerals example is instructive it is that there are just as likely to be big asset sales.

And again, if you’re at BHP, you can sit back and say, 'Well, we’ve got plenty of cash, plenty of borrowing capacity and a relatively strong share price. We can afford to sit back and wait for some of these companies to fail.’ Of course we know that Rio is being forced to sell some assets, a process it should have undertaken 12–18 months ago, and now regrets that it didn’t. So again, corporate activity around good assets. Some of it will be takeover-related.

Coca-Cola Amatil/Lion Nathan. Coca-Cola Amatil will be one to watch this year. Lion Nathan, with the backing of major shareholder Kirin, is currently bidding for the group; Lion Nathan and CCA’s major shareholder, The Coca-Cola Company, have held talks on the issue. Whatever the condition of the economy people still consumer soft drinks and other beverages. This is one to watch.

Foster’s. The big question is what Foster’s does with its wine business and the whole review that’s surrounding that. It’s actually said it could have something for the market in late January (that is, in the next two weeks) but certainly by February. So, there’s a maximum six weeks to learn about that.

It’s going to be difficult for Foster’s to demerge because of the issues with debt. Most of the debt is associated with the wine business, which has US-dollar revenues, but the cash cow of the business is beer. So the beer business can afford the debt. Wine can’t afford the debt because it’s a much more cyclical business, but that’s where the debt naturally sits. So the company would have to work that out, but it’s not as difficult to deal with as people might think: you can enter into swap arrangements and so forth, and I’m beginning to think that’s what they’ll do. So Foster’s is another consumer staple business in the takeover arena

OM Holdings/Consolidated Minerals. We know that Consolidated Minerals, which used to be a public company but is now owned by the Ukranian billionaire Gennadiy Bogolyubov, has taken a 12% stake in manganese miner OM Holdings. Manganese is a mineral that’s been hit hard.

Now, because OM Holdings is registered in Bermuda it doesn’t fall under the Australian takeover laws, but all of a sudden it’s found religion and decided that the takeover laws that prevent bidders from going over 20% without making a full bid are actually quite a good thing and it wants to entrench aspects of those laws in its own constitution. It’s an interesting little battle. CSM says it has no intention as yet for a full bid, but it hasn’t bought 12% of OM for the staff super fund. OM is essentially fortifying itself.

MYOB. Speaking of private equity, the MYOB bid will probably go unconditional in the next day or so. In fact, the bid is scheduled to close on Wednesday. The Manhattan Software consortium – including Archer Capital – has 92% of the accounting software firm so effectively it is unconditional. There are one or two minor things left to be fulfilled.

So Archer Capital and its associates finally got their hands on MYOB, after the much higher tilt of $1.90 per share was rejected by MYOB board. For the private equity firms that raised money at the right time and don’t have too many problem investments to deal with, now is a very good time for them because asset values are depressed and they don’t have compete so much with trade buyers. They’re also less likely to get caught in bidding wars.

JB Hi-Fi. Woolworths examined buying JB Hi-Fi six months ago. JB Hi-Fi is a company I have immense admiration for; I like its business model, it’s low cost and that it gives people what they want. There are some technological issues against it, such as CD sales falling double digit percentages each year, but notwithstanding the recent fall in the Australian dollar, the price of electronic goods is generally still in a downwards direction and the technological advances go up, so people now can buy themselves a lot of entertainment for a relatively small amount of money. And in bad economic times, I think people will still want to play computer games and watch DVDs and perhaps entertain more in the home. So I think a business like that almost becomes a consumer staple business, and I think that will make it of attraction. It doesn’t surprise me that Woolworths had a look at it and they may well do so again.

Arrow Energy/Pure Energy. Late last year, Arrow launched a $673 million takeover offer for Pure Energy, in which it already held 19.9%. Arrow offered $2.70 cash and 1.21 of its own shares for Pure, valuing it at $5.40 per share.

What's interesting about this is that Pure was trading at a 9% discount to the deal before Christmas and it’s still trading at a 6% discount. This is friendly deal. Pure Energy’s major shareholder, Shell, has essentially backed the deal and the overall stockmarket would have to fall almost 20% for the deal conditions to be breached. This huge spread exists because people are uncertain about short selling; they’re nervous, and there just aren’t that many funds playing them. To compare, for the last few years, if a bid was announced and it was $1 a share, you’d had to pay $1.00, $1.01, $1.02 '¦ you’ve had to potentially lose 1–3% just to get into the game. You can now get into agreed deals at a nice discount, which is an adequate profit all by itself.

When everybody exits the market, it throws up opportunities so even if deals aren’t being counter-bid, you can still make a nice profit. And let’s face it, making a safe 3–6% in the space of a few months looks pretty good these days.

Redflex. Redflex announced almost three months ago that it had received approaches and it’s really been very quiet since then. Would you buy Redflex shares on that basis? I just don’t know whether those bids are still real. The company should tell us.

Linc Energy. It’s not so much a bid, but Linc Energy in Perth effectively had a deal to sell its coal assets for $1.5 billion to China's Xinwen Mining Group, for more than its market capitalisation. Well, when you look coal prices, you’d have to say that the fact that the deal hasn’t yet been completed means it’s probably going to fall apart. It was always subject to a few things like permissions from the relevant Chinese authorities. My view is the Chinese are doing whatever they can to pull out of it.

AGL/Sydney Gas. Another sector that may attract more deals is coal seam gas. That sector just shows no signs of stopping. The latest development is AGL bidding for Sydney Gas. Unfortunately, it’s hard for people to play because it’s what we call an on-market bid, which you don’t see many of. Most bids are off-market; that is, they bid a price and either there’s a shareholder meeting or people just accept the bid. But with an on-market bid, the buyer actually stands in the market, and it guarantees for a certain period of time – at least a month but possibly longer – to buy all and any shares that are sold at that price, but you can’t pay more than that price. So, you can’t buy it at a discount because in this case AGL is in the market every day for tens of millions of shares and you could pay more; if the bid’s 42.5¢, you could pay 43¢, but you would be somehow betting that AGL might increase its price, and that’s highly unlikely because most people are selling at 42.5¢.

The reason bidders don’t always do them is because: 1) someone can sit just above them; and 2) the bidders don’t know what proportion of the target company they’ll get. They might get 10% or they might get 80%. It just depends who sells.

And let’s say they only get 45%, which is not a good number because it doesn’t give you control of the business; that’s what you’re stuck with. So you take a bit of a gamble when you have them. But that’s what that is. So, the good thing is if you want to accept that bid, if you’re a Sydney Gas shareholder, you just sell on market and it’s done.

Paladin Energy and Fusion Resources. The board of uranium explorer Fusion Energy told the market last week it had accepted Paladin's $17.8 million off-market scrip takeover offer. Paladin has offered one of its shares for one Fusion share, valuing Fusion at 36.5¢ each. Paladin now has about 42% acceptances, but I think it’s got to get to at least 50% before it extends the offer. To play this deal you'll have to short Paladin, which can be done with a bit of difficulty. But if Paladin doesn't get to 50% it'll get hairy.

Bendigo & Adelaide Bank. Second-tier banks are likely to come under the microscope this year but interestingly Bendigo & Adelaide Bank has been the aggressor lately, taking 8% of the merged IOOF and Australian Wealth Management and acquiring Macquarie Bank’s margin lending business, which was a slightly odd purchase for a community bank.

As for the other mid-tiers, we already know that Bank of Queensland has knocked back bids before, and that Suncorp's banking business is unofficially for sale.

But the federal government’s guarantee – which allows mid-tier banks to use its AAA credit rating – might actually make buying second-tier banks a bit more difficult for the Big Four because Suncorp, Bank of Queensland and Bendigo can now theoretically replenish money at a very low cost.

So, do the big banks need to buy them? Only at the right price, which is a figure they would not accept at the moment. Wizard shows the big banks can sit there and wait.

Tom Elliott, a director of MM&E Capital, may have interests in any of the stocks mentioned.

nTakeover action, January 12, 2009
Date	Target	ASX	Bidder	(%)		Notes
30/12/08	Aequs Capital	AQE	Findlay Securities	90.83
18/11/08	Amazing Loans	AZD	IEG Holdings	27.32
29/12/08	BigAir Group	BGL	Clever Communications	13.70		Offer closed.
05/01/09	Broadcast Production Services	BKR	Prime Media Group	77.11		Offer for the balance. Ext to Feb 20.
28/11/08	Espreon	EON	Vectis	19.73		New offer, after terminated scheme.
08/01/09	Fusion Resources	FSN	Paladin Energy	37.74
06/01/09	GoldLink IncomePlus	GLI	Emerald Capital	50.40		Seeks 45%. Ext to Dec 10.
23/12/08	Incremental Petroleum	IPM	TransAtlantic Petroleum	18.87
30/12/08	Ingena Corp	IGG	UXC	94.45		Compulsory acquisition.
22/09/08	Murchison Metals	MMX	Sinosteel	0.00		Cleared by FIRB to move to 49.9%
02/01/09	MYOB	MYO	Archer Capital, HarbourVest Partners	90.01
02/10/08	Perilya	PEM	CBH Resources	0.00		Renewed offer. See also Foreshadowed Offers.
09/12/09	Perilya	PEM	Zhongjin Lingnan	0.00		Proposed placement for 50.1%
09/01/09	Sydney Gas	SGL	AGL Energy	59.00
18/12/08	Waratah Coal	WCI	Mineralogy (Clive Palmer)	90.70		Extended to Jan 5.
nScheme of Arrangement
24/07/08	Australasian Resources	ARH	Resource Development International	66.37		Resource Devel associated with Clive Palmer who holds 66.37%.
24/11/08	Australian Wealth Management	AUW	IOOF Holdings	0.00		Vote March.
22/12/09	Avexa Pharmaceuticals	AVX	Progen Pharmaceuticals	0.00		No vote date set.
19/12/08	Jackson Minerals	JAK	Scimitar Resources	0.00		No vote date set.
04/11/08	Island Sky Australia	ISK	Salton Inc	0.00		No vote date set.
05/12/08	People Telecom	PEO	M2 Telecommunications Group	0.00		No vote date set.
28/11/08	Scarborough Equities	SCB	Bentley International	0.00		No vote date set.
nBackdoor Listing
22/12/08	BMA Gold	BMO	Aflease Gold shareholders	95.60		Aflease shareholders to control "Gold One". Vote Jan 21.
06/11/08	Jupiter Mines	JMS	Pallinghurst Res & Red Rock Res	0.00		Agreement signed, subject to EGM.
07/11/08	Metminco	MNC	Hampton Mining	0.00		To acquire 51% of unlisted Hampton. Change of control.
nForeshadowed Offers
03/11/08	APN News & Media	APN	Several unnamed parties	39.00		Independent News & Media has approaches on its 39% holding.
23/10/08	Babcock & Brown	BNB	Unnamed parties	0.00		Expressions of interest.
22/12/09	Babcock & Brown Power	BBP	Several unnamed parties	0.00		Non-binding indicative submissions.
28/10/08	Becton Property	BEC	Several unnamed parties	0.00		Due diligence starts.
22/10/08	Bravura Solutions	BVA	Ironbridge Capital	0.00		Discussions terminated. Possible alternative proposal.
05/12/08	Felix Resources	FLX	Several expressions of interest	0.00		Confirms ongoing interest.
16/10/08	Jackgreen	JGL	Unnamed parties	0.00		Received approaches.
07/11/08	MDS Financial	MWS	Unnamed parties	0.00		Rejects offer for Market Data. Other discussions continue.
28/11/08	OM Holdings	OMH	Consolidated Minerals	11.00		Seeks ConsMin intentions.
05/12/08	Perilya	PEM	Unnamed parties	0.00		Alternative proposals.
14/11/08	Redflex Holdings	RDF	Unnamed parties	0.00		Unsolicited indicative proposals.
11/12/08	Ventracor	VCR	No party as yet	0.00		Seeking expressions of interest.
30/12/09	Vision Group	VGH	Several unnamed parties	0.00		Non-binding conditional offers.
07/11/08	Warehouse Group	WHS	Woolworths	0.00		Media reports that Woolworths still interested in offer.