Buyers will line up for RHG book

RHG Mortgage Corp is keen to sell its mortgage book, and there’s no shortage of interested parties.

Summary: Value funds have taken strategic positions on RHG’s share register, and there is likely to be upside as the group looks to offload its mortgage book.
Key take-out: Non-bank lender RESIMAC is believed to be in acquisition talks with RHG.
Key beneficiaries: General investors. Category: Portfolio management.

RHG Mortgage Corporation Ltd (RHG)

RHG, formerly RAMS Home Loans, confirmed this week that it has met with another party regarding the possible sale of its $2.5 billion mortgage book. RHG hasn’t yet confirmed who it’s in talks with, but from what I’ve heard, RESIMAC, a non-bank lender, is the other party. At current levels, RHG seems like a pretty good buy to me.

On Tuesday, the share price increased from 46 to 50 cents. The fact that it has risen by less than 10% means that there’s likely a fair way to go. But if this deal doesn’t go through, I think another one will in the not too distant future.

The deal wouldn’t be a takeover per se, simply a sale of assets and a return of capital. There are some tax issues, such as capital gains tax et cetera, that add a bit of colour to it, but I think this is quite an attractive asset to buy into at the moment. That’s why the value funds, like Cadence Capital, Alceon and Wilson Asset Management are in there. Cadence Capital has a 17.1% holding, Alceon holds 20%, and Wilson Asset Management holds just under 5%.

These activist funds control about 42% of RHG and have been pushing the company to do something like this for some time. Even if this proposal doesn’t result in a final deal, it’s pretty likely that there will be another one in the not too distant future.

For those considering buying in, it is speculative, since RHG and RESIMAC are just at the discussion stage. But the downside is only 10%, while I think the upside is probably north of 60 cents. Seems like a pretty good trade to me.

Sundance Resources (SDL)

There’s been another delay with the Sundance Resources takeover. This is just looking less and less likely as time goes on. I would stay away.

There’s been speculation this week that the buyer, Hanlong Mining, will have to bring another partner into the mix. I would say that while Hanlong could probably finance the purchase of Sundance, the big problem is whether it can get access to the funding it needs to develop the iron ore mine in the Congo. It’s been estimated that it could cost $5 billion to develop this mine because there’s so little infrastructure over there.

Sundance shares retreated on the speculation. The only good news for Sundance is that the iron ore price has improved a lot, but really, this is not an iron ore mine, it is a resource located in the middle of nowhere in one of the most dangerous parts of earth. The cost to build the mine will be the same, no matter what the price of iron ore is.

I’ve been saying for some time now that investors should stay away from Sundance (No iron clad guarantee on Sundance). It’s just all too hard at the moment. There is almost 15 cents of upside if the deal comes off, but if it doesn’t, investors will just be left with a company that owns a lump of dirt in the middle of Africa and needs $5 billion to develop it.

At this stage, I give it less than a 50% chance of the takeover going ahead. Having said that, the risk/return trade off isn’t that bad right now. At 30 cents you’ve got 50% of upside, so I suppose those who are real speculators might be attracted by the potential for the price to go from 30 to 45 cents. But I would say it’s much more likely that the 30 cents will go down to 20 or 25 cents and the deal will be off. It’s not one I would invest in.

Australian Infrastructure Fund (AIX)

There has been talk recently that some of the underlying funds that have pre-emptive rights over the assets have been kicking up a bit of a fuss about the way the Future Fund structured the deal. As I said last week, it’s a storm in a teacup. The deal has been approved. It will go ahead and the rate of return, at $3.11, is still quite good. For an investment of $3.11, you’ll get a payoff of between $3.19 and $3.23 in the next 5-11 months, and there could be franking credits on top of that.

But while it’s a safe deal, it’s by no means a massive profit. For an investment of $3.11, you’ll make just 10 cents. Still, in an environment of low interest rates, people are attracted to that. But it is almost certainly going ahead.

Billabong (BBG)

Billabong is still waiting for the bidders, led by Paul Naude, to complete the due diligence phase, which should come to an end in the next couple of weeks. For me, the prospect of a takeover has improved by the recent upturn in retail, but it’s not enough to make me want to invest at current prices.

There appears to be a bit of a recovery in retail in terms of consumer spending lately, not just in Australia but elsewhere too. JB Hi-Fi has risen 18% in the past couple of days, Myer and David Jones are well off their lows, and even Harvey Norman is showing some signs of life. On that basis, Billabong is looking a bit better than it was, and its chances of securing a deal have increased somewhat. Having said that, Billabong still has to address the fundamental issue of whether its brand still resonates with consumers.

I still think there’s a pretty good chance that a takeover will go ahead, but I don’t think the premium to the current share price will be particularly high. There’s only a modest chance of a profit here, and if the deal doesn’t go ahead the stock will retreat again.

For me, it just seems like it’s too hard and there’s not enough profit upside for me to buy in at 96 cents.

Ruralco (RHL), Elders (ELD)

Earlier this week, Ruralco chairman Robert England told shareholders that the company is still interested in the Elders Rural Services business. There are only two reasons I can think of that could explain why Elders isn’t talking to Ruralco. The first is because Elders is too proud. The second is because the banks have already stepped in. This is definitely one that I would stay away from

At the moment, Elders is facing extinction. It’s just going to sell off different parts of the business and pay down its debt. It’s debatable whether there’ll be much of a return for shareholders at all.

If Ruralco is offering to take on the company’s debts and merge the stock, I would have thought that would be a better outcome for shareholders than Elders just selling off parts of the business to pay down debt.

If the issue is not that Elders is too proud to engage in talks with a rival, then the only other conclusion that I can come too is that the banks have taken control of the company. The banks will only be interested in selling assets and getting their money back.

Elders is not one that I would buy into. For me, there’s a real risk that investors could lose everything here. If the banks get an offer for the assets than just a dollar more than what they’re owed, they’ll take it. And they’ll leave the dollar to be divided up among the shareholders. This is one to stay away from.


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

Takeover Action February 4-13, 2013

DateTargetASXBidder(%)Notes
13/02/2013Central Australian PhosphateCENRum Jungle0.00
23/10/2012Clearview WealthCVWCrescent Capital Management62.70
6/02/2013Discovery MetalsDMLCathay Fortune16.17Unconditional. Ext to Feb 15
6/02/2013EngencoENGElphinstone Group45.60
18/12/2012Firestone EnergyFSERange River Gold0.00
8/02/2103Globe InternationalGLBMariner Corporation0.00Board rejects offer. Unconditional
31/01/2013Gujarat NRE Coking CoalGNMJindal Steel & Power19.48
1/02/2013L&M EnergyLMENew Dawn Energy95.11Incl lock-up agreements
7/02/2013LinQ Resources FundLRFIMC Resources87.54FIRB approves. Ext to Feb 18
15/10/2012MintailsMLISeager Rex Harbour40.33
30/01/2013Neptune MarineNMSMTQ Corp83.36Unconditional
29/06/2012Real Estate Capital Partners USA Property TrustRCUWoolley GAL II32.81Incl 30.99% associates' holdings
1/10/2012United OrogenUOGIron Mountain Mining78.55Unconditional
1/02/2013Wentworth HoldingsWWMAustralian Renewable Fuels41.20Incl 19.81% pre-bid
8/02/2013Wilson HTMWIGMariner Corp0.00Ext to June 28
Schemes of Arrangement
24/12/2012Avocet ResourcesAYELion One Metals0.00
1/02/2013EndocoalEOCChina Yima Coal/Daton Group0.00Vote Feb 28. FIRB approves
18/01/2013PMI GoldPVMKeegan Resource0.00Vote Feb 20
31/01/2013SkywestSXRVirgin Australia0.00ACCC clears offer
30/01/2013Sundance ResourcesSDLHanlong Mining Investment17.99Meeting adjourned. Date TBA
22/01/2013Texon PetroleumTXNSundance Energy Australia0.00Vote Feb 25
Foreshadowed Offers
1/02/2013BerkleeBERBid Group0.00Oct 18 indicative offer withdrawn
1/02/2013BerkleeBERBrett Jones - managing director0.00Offer to takeover certain assets
4/12/2012GraincorpGNCArcher Daniels Midland19.90Revised indicative offer
8/01/2013Westside CorpWCLUnnamed party0.00Discussions continue
26/10/2012WHK GroupWHGSFG Australia0.00Discussions

Source: NewsBites

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