Can BHP break its hoodoo with Woodside?

PORTFOLIO POINT: Nomura analysts add to speculation that BHP could launch a scrip offer for Woodside.

BHP Billiton/Woodside Petroleum. Speculation that BHP (BHP) could launch a bid for Woodside (WPL) was given a kick over the weekend after Nomura analysts suggested a scrip merger of relative equals between the miner and the energy company could be a goer.

The more I think about it, the more it makes sense. Shell is absolutely keen to sell its 24% stake in Woodside and BHP’s Marius Kloppers is under considerable pressure to do something as an acquisition-hungry CEO. Remember, he has had three cracks at building growth through acquisitions and for various reasons not one of the three has come off.

I don’t think it would be a merger of equals, because I don’t think Woodside is necessarily an equal and remember Woodside is in management transition mode, so it’s not equal because its CEO is leaving soon. Having said that, Woodside is a more expensive company in terms of earnings multiples.

The thing is when you offer scrip there are several advantages. Unlike borrowing money, you can issue as many of your own shares as your shareholders are prepared to approve, but you run the risk of depressing the value of those shares. Second, for Australian-based shareholders you offer capital gains relief. If a company is taken over, you get what’s called rollover relief, so shareholders in Woodside who might have been there for years and have seen their investment go up dramatically, don’t suddenly have to pay capital gains tax (CGT), which could be a considerable amount if they take BHP shares.

The whole BHP-Woodside takeover speculation was reignited earlier this month after Shell agreed to sell nearly a third of its stake in Woodside for $3.3 billion, but I don't think Shell would want BHP shares. Given the fact that they want out of Woodside, they’re not going to swap a big stake in Woodside for a 5% or 10% stake in BHP. What would be the point of that from Shell’s perspective? So as much as Nomura analysts point out that a scrip offer makes sense, you’ve got to think about it and remember that Shell’s the one that has to kick this process off it is the one with the 24% stake.

I think the solution here is probably a combination of the two; cash or scrip.

QR National. QR National (QRN) has made its debut in the ASX today and the shares opened at $2.54, slightly below the company's offer price of $2.55. The $2.55 price was near the bottom end of the forecast range of $2.50–3 and, to make matters worse, the Queensland government has decided to hang on to a high stake (33.7%), which just creates a perception of an overhang.

You may remember that BHP Billiton was part of a consortium of miners, including Rio Tinto and Xstrata, that had been hoping to grab QR National's rail assets for $5.1 billion. But with the state government now set to hold a substantial stake, I don't think there's any chance of them touching the stock until the government sells its stake.

The consortium was put together to counter the float but it dropped its bid in September and, given the fact that Anna Bligh's government wasn't ready to play ball the first time around, there is little chance that they would be willing to sell their stake to any interested parties right now.

The substantial stake also makes QR National takeover-proof for now but you never know what could happen if there is a change in the state government. State elections in Queensland have to be held before June 2012 and I think a Liberal-National government is more likely to sell the stake down.

Ideally, it could just do a book-build and say it needs to sell because of the “terrible financial mess that we have inherited from the Bligh government” and sell for $2 a share. It’s always important to look at those strategic stakes and see what could happen with them. The Queensland government, for the time-being, isn’t going sell its stake whereas Shell’s strategic stake in Woodside is clearly up for sale.

AXA/AMP. Well, the last independent director on AXA Asia Pacific Holdings (ASX APH) has approved AMP’s $13.3 billion cash and scrip bid after holding out for more information last week, and I think the deal has a very high chance of succeeding.

AMP lobbed its bid on November 18, and five of the six independent directors immediately supported the deal, while the unnamed final director needed a little more information before giving the nod. A day or two later AXA said the board unanimously recommended AMP’s bid in the absence of a higher offer.

AXA shareholders get a guaranteed $6.43 as long as AMP doesn’t fall below $4.50, after which it can call the deal off without paying a break fee, and AXA’s dividend, which is estimated to be 9.25¢.

The payout is unlikely to be come before April, maybe May. You would have thought, given they’ve been talking about this for more than a year, that it would be quicker, but it’s going to be a fairly drawn-out process so there is still some risk here; if the market were to really shake-out again, and that’s certainly possible, AMP’s share price could suffer but at the moment AXA’s French parent obviously desperately wants the sale to occur.

Some people are even saying it’s now getting the Asian assets at too cheap a price – $10.4 billion, which is $800 million more than the previous offer – but that’s simply based on the growing view that Asia looks OK, but Europe and North America look suss. The world won’t stay like that, as Asia will eventually slow and Europe and North America, hopefully, will eventually pick up.

Brockman Resources. Emerging iron ore producer Brockman Resources' board has formally rejected the all scrip offer lobbed by its Hong Kong listed shareholder Wah Nam International, which had offered Brockman 30 of its shares for every one Brockman share. The bid valued Brockman (BRM) at $932 million but, as I said last week, the iron ore explorer's board had no choice but to reject the offer given that you cannot put an objective value on Wah Nam's scrip. (For more on Wah Nam, click here.)

So Brockman's board has a couple of options: it could just reject the bid and keep going forward on its own, or it could try and find another merger partner. Brockman shares rose quite substantially in response to Wah Nam's bid and if I were a shareholder with a short-term mindset, I would probably be getting out. However, there's a flip side to consider because Brockman has a very positive iron ore story and might be worthwhile in the long term, once it gets full funding for its projects.

Citadel Resources. Moving to the copper explorer Citadel Resources (CGG), institutional stockbroker Petra Capital has been leading the charge to get Citadel's shareholder's to reject the 52.2¢ cash and scrip offer put forward by suitor Equinox Minerals, saying that there is a chance a higher bid on the horizon.

Equinox's offer has been recommended by the Citadel board and has been generally well received by institutional investors but given that Citadel's shares have been trading at half a cent to a cent above the value of the bid, it would suggest that the market is starting to buy Petra Capital's line. I think there’s a good chance that Equinox may end up sweetening its offer it certainly has enough cash to do that.

So they could opt to put some more cash or they could improve the scrip component or maybe do both. The number being talked about is 65¢, but it’s just a rumour while Citadel was trading today around 52¢. The downside here is pretty low and there is a significant upside if Equinox does indeed decide to bump up its offer. So it’s probably the most attractive of the takeovers that I can see at the moment.

Beach Energy/Impress Energy. Also in the oil and gas sector, explorer Beach Energy (BPT) has announced a merger with Impress Energy (ITC), so it can speed up the development of both companies’ Cooper Basin assets.

Beach’s plan to buy all the shares in Impress that it doesn’t already own for 8.25¢ each, valuing Impress at $73.1 million, is very small and the operations are in South Australia, so it’s not super relevant to Woodside’s Pluto.

But it’s a good deal for Impress. Their shares have languished a bit between 4¢ and 8¢ a share for about the past 10 years, so the fact that it’s been recommended immediately by the board suggests that it’s the best deal they’re going to get.

With the shares trading around 7.9¢, the 8.25¢ offer seems a reasonable margin. And you never know – someone else may put in another bid for it; it’s unlikely but always possible.

Sphere Minerals. Finally to Sphere Minerals (SPH) and just a little lesson to illustrate that hedge funds don't always make the best call. Sphere shares have been trading mainly above $3 a share even as Swiss miner Xstrata strengthens its grip in the iron ore miner with its final and unconditional $3 a share offer.

Now I recently bumped into an adviser to the deal, who told me that a hedge fund shorted the stock at $2.97 before Xstrata went unconditional with its offer. Xstrata had said that if it didn't get 50% acceptances from Sphere's shareholders it would drop the bid and it looks like the hedge fund thought it would short the stock because it would make 50¢, maybe $1, if Xstrata walked away and their downside if the deal went ahead would have been only 3¢.

What they forgot is that when you short – and this is a lesson for people who think short selling is all one way – you must buy the stock back and, as Xstrata gets more and more acceptances and Sin-Tang is expected to hang on to its 13.5¢, there’s not so much stock left to buy. So it looks they’re now being forced to pay over the odds, up to $3.10, to close out their position before the bid ends.

If the bid ends and they’re short, they’re in all sorts of trouble because Xstrata could demand whatever price it wants from them. So they’re desperately buying whatever stock is available on the market and that just shows that hedge funds aren’t always smart, and short sellers don’t always make money.

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

-Takeover Action November 15-19, 2010
Date	Target	ASX	Bidder	(%)	Notes
19/11/10	Aevum	AVE	Stockland	93.17	Bid extended Nov 12
19/11/10	Ammtec	AEC	Campbell Brothers	96.62	Suspended.
18/11/10	Apollo Gas	AZO	Dart Energy	36.16	Bidder's statement despatched; offer closes Dec 2
11/11/10	Brockman Resources	BRM	Wah Nam International Holdings	21.11
25/10/10	Citadel Resources	CGG	Equinox Minerals	19.90	Recommended takeover announced
12/11/10	Copper Strike	CSE	Kagara	17.22	Rejected.
17/11/10	Entellect Solutions	ESN	Mooter Media	56.88
11/11/10	FerrAus	FRS	Wah Nam International Holdings	19.90
15/11/10	India Equities Fund	INE	Bell IXL Investments	0.00	Offer withdrawn.
25/10/10	Laguna Resources	LRC	Kingsgate Consolidated	11.33	Recommended off-market offer announced
22/10/10	Northern Energy	NEC	New Hope Energy	4.94	Offer rejected.
01/11/10	Padbury Mining	PDY	Fe Ltd	1.35	Bid unconditional
19/11/10	Sphere Minerals	SPH	Xstrata	72.78	Unconditional.
Schemes of Arrangement
29/10/10	Andean Resources	AND	Goldcorp	19.90	Vote Dec 3. Court approves bid.
25/10/10	ASX	ASX	Singapore Exchange	0.00	Parties announce agreement. Vote Mar 2011.
04/11/10	Avoca Resources	AVO	Anatolia Minerals Development	0.00	Vote Jan/Feb 2011; FIRB approval received
19/11/10	AWB	AWB	Agrium	0.00	Shareholders and court approve scheme.
18/11/10	AXA Asia Pacific	AXA	AMP	0.00	Vote end Mar.
22/10/10	Choiseul Investments	CHO	Milton Corporation	11.90	Vote Nov 26.
20/10/10	Dominion Mining	DOM	Kingsgate Consolidated	0.00
15/11/10	ING Industrial Fund	IIF	Goodman Group consortium	0.00	Due diligence.
18/11/10	Innamincka Petroleum	INP	Drillsearch Energy	0.00	Vote Dec 14.
18/11/10	Intoll	ITO	Canada Pension Plan Investment Board	0.00	Shareholders approve scheme.
20/10/10	ITX Group	ITX	Avnet	0.00	Vote Nov 29.
19/11/10	Keycorp	KYC	Archer Capital	0.00	Shareholders approve scheme.
12/11/10	MAC Services Group	MSL	Oil States International	19.90	FIRB approves scheme.
04/11/10	Provet Holdings	PVT	Henry Schein Inc	0.00	Scheme booklet registered; meeting Dec 9
12/11/10	Ross Human Directions	RHD	Peoplebank Holdings	0.00	Adjourned to Nov 25..
06/07/10	Sylvastate	SYL	Whitefield	0.00	Common CEO.
27/10/10	Wridgways Australia	WWA	Santa Fe Holdings	0.00	Vote Nov 25. Booklet despatched
Foreshadowed Offers
03/06/10	BOOM Logistics	BOL	Archer Capital, McAleese Group	10.47	Indicative scheme proposal.
12/11/10	Caledon Resources	CCD	Guangdong Rising Asset Management	0.00	Possible scheme. FIRB-approved.
15/10/10	Indophil Resources	IRN	San Miguel Corporation	10.10	Binding exclusivity period to Jan 10.
27/10/10	Perpetual	PPT	Kohlberg Kravis Roberts & Co	0.00	Perpetual to meet with KKR
22/10/10	Redflex Holdings	RDF	Unnamed third parties	0.00	Discussions progressing.
15/11/10	Ross Human Directions	RHD	Chandler Macleod Group	0.00	Due diligence.

Source: News Bites