Canadians keep MacBank guessing

PORTFOLIO POINT: Canadian investors have been careful not to label as final their bid for a Macquarie satellite. Maybe they’ll bid more, maybe not.
Macquarie/ Canadian Pension Plan Investment Board. The biggest takeover in the market is the bid for a Macquarie satellite: Macquarie Group has received a $2.50 a share cash bid for its infrastructure satellite Macquarie Communications Infrastructure Group (MCG) from Canadian Pension Plan Investment Board (CPPIB).

Macquarie Communications owns a big chain of broadcast towers and has broadcasters such as ABC and SBS as its main clients. It also owns a similar chain in the UK.

Now it is a very good asset but, like most of Macquarie’s infrastructure satellites, it just has too much debt. The Canadian Pension Plan Board is one of a number of semi public sector infrastructure investors and the Canadians appear to be very active in the infrastructure scene, with existing investments in Macquarie Infrastructure Group (MIG) and Transurban.

Macquarie had been actively looking for buyers for the asset and has recommended the bid, but the problem is coming from Macquarie Communications’ major shareholders, particularly asset manager Lazard Asset Management Pacific, which has a 10.9 % stake and has in the past knocked back bids. So the stock is trading more than 10% below the offer, with investors worried by the uncertainty.

The Canadians have come out and said that it’s highly improbable that they would consider increasing their bid, but haven’t said it’s impossible. They are aware of the Australian Takeovers Act, which states that if you say there will be no higher bid: full stop, that’s it; you can’t bid higher.

Saying that a higher bid is unlikely allows the Canadians to bypass that rule and offer a higher bid in the future.

My understanding is that shareholders like Lazard Asset Management Pacific have lost mandates because of their previous bad decisions and will be reluctant to play hard ball. If they did, the share price of Macquarie Communications would probably drop quite a lot.

So I think the market is perhaps overstating the risk, and it’s quite possible the Canadians will increase their initial offer. Their language was very carefully chosen, I believe, to not entirely exclude that possibility.

The downside risk is that the stock might go back to $1.60-odd. It actually rallied up to $1.70 prior to this bid, but it had come of a low of 80¢ just two or three months ago. The upside at this stage, with the stock trading about $2.20 (April 6), is obviously 30¢, so that’s about 13% and there’s the possibility of a higher bid. So, that’s an interesting one.

The fact that Macquarie Group is prepared to sell Macquarie Communications shows there’s been a bit of a change in thinking at the top level and a tacit admission that refinancing debt in some of its satellites is going to a tough job.

A successful sale would bring some of the other satellites into play, especially Macquarie Infrastructure, and the important lesson from all this activity is that Macquarie’s model of gearing up satellite funds is gone. What it means for Macquarie in the future – that’s harder to tell; the investment firm in the past has always found new ways of doing business, but it always seemed to depend upon cheap and available debt and that’s no longer the case.

China bids: OZ Minerals, Fortescue, Rio Tinto. Now the other big bid trading at an interesting level is OZ Minerals, which has struck a new deal with Chinese suitor Minmetals after Treasurer Wayne Swan ruled its Prominent Hill gold and copper mine – possibly its best asset – out of bounds for security reasons.

I had always thought that there was a big risk the government would knock back the original offer on national interest grounds and wasn’t really surprised by the decision. What was surprising was the defence implications cited by Swan (Prominent Hill is within the Woomera rocket range) rather than the government’s opposition to a Chinese state entity owning 100% of an Australian company.

Interestingly, Minmetals came back to the table and this shows how willing the Chinese, with their massive foreign reserves, are to do these deals. Remember, the Chinese are the consumers of these commodities, by and large. So, they probably have a better feel for where their consumption is going to go down the track, and hence they want to buy the assets that produce commodities such as aluminium, bauxite and copper now.

So that says something, and of course you’ve got the other two deals, which are only partial deals for Fortescue and Rio Tinto. Now, Swan has approved a $644.8 million investment by Chinese steel company Hunan Valin in Fortescue Metals Group, but it has come with strings attached.

Swan says the Chinese steel maker would have to report to the Foreign Investment Review Board (FIRB) on undertakings concerning its board membership and any director appointed to the Fortescue board by Valin comply with the company's directors code of conduct.

A decision is still pending on the Rio Tinto/Chinalco deal and the miner may be contemplating contingency plans, with media speculation in UK newspapers over the weekend that Rio is set to raise $US 8 billion ($A 11.2 billion) in a rights issue.

Now some Rio shareholders are vehemently opposed to the Chinalco deal and have been clamouring for a rights issue and if the Chinalco deal falls through they may get their wish.

Arrow Energy. In oil, Arrow Energy has bought the Tipton West coal seam gas project from Beach petroleum for $260 million cash plus some scrip, so all up about $330 million.

We have previously mentioned Beach as being a takeover target by Arrow and it looks like the company has decided to buy an asset rather than the whole company.

Interestingly, Beach shares initially fell after the deal was announced because a lot of people thought that the asset was worth upwards of $400 million, and what they got was roughly $330 million in cash and shares. Arrow’s move clearly shows that the company wants to expand; especially after missing out on Pure Energy. I think Arrow is a target and with the level of activity going on in the oil and gas sector at the moment, its one to keep an eye on.

Seven Network/Fairfax. There are rumours that Kerry Stokes's Seven Network is running the numbers on Fairfax Media after an analyst from Citigroup examined the possibility of a potential tie-up of Seven and Fairfax. It’s important to realise this stock, which we think of as the listed company Seven, is a large minority shareholder in the Seven Network along with private equity firm Kohlberg Kravis Roberts (KKR).

It certainly has the financial muscle to buy Fairfax, probably without the need for any extra financing and could do it via West Australian Newspapers (WAN) in which it holds a substantial stake. The real question is do they really want Fairfax?

If Seven bought Fairfax, my feeling is that they would have to sell some of the assets, because Fairfax has capital city radio, capital city newspapers and regional television. Current regulations allow a media company to own two out of three of the major broadcast platforms in any city and if Seven did get its hands on Fairfax it would have to cut one of Fairfax’s assets loose, most probably the radio stations.

Stokes has never been a radio person; he seems to like print and he certainly likes TV, so Fairfax radio stations such as 3AW, 2UE and so forth, they could be sold. Stokes maintains it’s a great time to buy media assets but I think the big risk is that he still thinks of media the old way – TV, radio, newspapers – and we know that scene for traditional media outlets is changing thanks to the internet and pay television. The old rules about media have changed, and I don’t know whether Kerry Stokes realises that or not. Seven/Fairfax is theoretically possible, but it would have to involve some divestments and would be a difficult transaction for Seven to carry out.

Crown Casino. Another rumour doing the rounds is that James Packer’s Crown Limited is eyeing an investment in an $US8 billion ($A11.2 billion) Las Vegas complex being developed by MGM Mirage.

Crown has stated on the record that it is not in talks over the project and I think Crown shareholders will be better served if the casino operator steered clear of any new deal.

Crown has burnt a lot of money overseas and I don’t think the market would reward it for committing to another massive project in Las Vegas.

Crown is going to struggle to raise more money; its best assets are the ones in Australia – Burswood casino in Perth and Crown casino in Melbourne – and this idea of having large but minority stakes in different projects around the world seems unrealistic. There are signs that the Macau assets are starting to work, but that operation is encased in a joint venture with Ho family's Melco empire. Macau may be doing well but gambling in the US has gone down dramatically.

Gambling is no longer monopolistic and to think about the stocks in this way is flawed. Packer’s assets in Australia may be local monopolies but if you look at what he’s buying overseas, they are competing against dozens of other options, even in the markets that they’re in. It’s a tough game and it has not worked well for Crown so far.

Macarthur Coal. Back to the miners, and looks like Ken Talbot, the former chief executive of Macarthur Coal, had a remaining 3% stake in the miner, which he has offloaded to CITIC for $3.85 a share. Talbot pocketed about $850 million in 2008 after selling the bulk of his stake to POSCO and to Arcelor Mittal, at about $20 a share. The $3.85 a share price tells you that Macarthur Coal isn’t going back up to $20 a share any time soon.

CITIC now owns a 13% stake in Macarthur, with Posco and Arcelor holding about 20%. I see Macarthur as a potential takeover target, but it’s going to be difficult when you’ve got all those players, all of whom can block the other; involved in the game.

Gloucester Coal. Gloucester Coal is still trading above the bid by New Hope Coal at $4.85 (it is trading today, April 6, at $5.10). The Gloucester board is out there trying to get a better bid, and the market is pricing the stock with a small premium on the hope that they will get that bid, knowing that a $4.85 “put”, if you like, is hard.

All of this is dependent on the Whitehaven deal not going ahead, which I don’t think is going ahead now. So that’s the interesting one. Basically let’s say you pay between $5.05 and $5.10. At $5.10 you are paying 25¢ for a call option. Twenty-five cents is about a 5% premium, so you’re paying a 5% premium for a call option on a higher bid.

Bendigo & Adelaide Bank. And finally to Bendigo & Adelaide Bank, whose plan to issue $174 million of convertible preference shares as part of a wider plan to delist its Adelaide Managed Funds Asset Backed Yield Trust (AYT), have hit a roadblock.

There was substantial uncertainty about the value of the convertible notes and the Australian Prudential Regulation Authority (APRA) has come out and put a halt on the takeover. AYT effectively buys portfolios of loans from the Bendigo Bank, and the regulator has said that there’s a conflict for the Bendigo Bank to effectively buy back its own loan book.

Now this is slightly odd and if the Bendigo Bank wants to buy back its own loans, I don’t see why there should be a problem, but APRA is not convinced. So the takeover is off, and the Bendigo board is going to look at other ways of monetising the asset.

Selling portfolios of home loans is a difficult thing, but of course Westpac did it with Rams Home Loans. Australian home loans are probably in better shape, in terms of being able to be sold as a package, than US ones. I suspect they will find some sort of alternative solution.

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

nTakeover Action March 30-April 3, 2009
Date	Target	ASX	Bidder	(%)	Notes
16/01/09	3D Oil	TDO	Drillsearch Energy	19.90
25/02/09	Amazing Loans	AZD	IEG Holdings	86.53
01/04/09	Arana Therapeutics	AAH	Cephalon	24.83
05/03/09	Bonaparte Diamond Mines	BON	Minemakers	0.00
13/03/09	Broadcast Production Services	BKR	Prime Media Group	77.34	Offer for the balance. Ext to May 22.
20/01/09	GoldLink IncomePlus	GLI	Emerald Capital	52.71	Closed. Holding depends on Panel finding.
19/03/09	Hannans Reward	HNR	Fox Resources	0.00	Not for options.
27/03/08	Heartware International	HIN	Thoratec Corp	0.00	Subject to approvals.
01/04/09	Hutchison Telecommunications	HTA	Vodafone	52.30	ACCC concerned. Further submissions by Apr 17.
04/03/09	Murchison Metals	MMX	Sinosteel	5.85	Cleared by FIRB to move to 49.9%
27/03/09	Pure Energy	PES	BG Group	96.47
01/04/09	Queensland Ores	QOL	Metallica Minerals	0.00	Independent expert to compare offers.
03/04/09	Queensland Ores	QOL	Outback Metals	8.55
10/03/09	Terrain Minerals	TMX	Iron Mountain Mining	0.00
21/03/09	Whitehaven Coal	WHC	Gloucester Coal	0.00	Panel orders shareholder approval. Pre-bid agreement relinquished
Scheme of Arrangement
31/03/09	Adelaide Managed Funds Asset Backed Yield Trust	AYT	Bendigo and Adelaide Bank	0.00	Blocked by APRA.
01/04/09	Australasian Resources	ARH	Resource Development International	66.37	Agreement expired.
06/03/09	Australian Wealth Management	AUW	IOOF Holdings	0.00	Vote April 22.
03/04/09	Chalice Gold Mines	CHN	Sub-Sahara Resources	0.00	To complete mid-July.
01/04/09	OZ Minerals	OZL	China Minmetals Corp	0.00	Offer adjusted. Vote May/June.
12/01/09	International Goldfields	IGC	NKWE Platinum	0.00	To complete March 31.
20/02/09	Island Sky Australia	ISK	Salton Inc	0.00	Vote July 6.
19/12/08	Jackson Minerals	JAK	Scimitar Resources	0.00	No vote date set.
31/03/09	Macquarie Communications Infrastructure	MCG	Canada Pension Plan Investment Board	0.00	Vote late June.
25/02/09	People Telecom	PEO	M2 Telecommunications Group	0.00	Vote April 6.
Backdoor Listing
30/03/09	Jupiter Mines	JMS	Pallinghurst Res & Red Rock Res	43.68	Approved.
16/03/09	Metminco	MNC	Hampton Mining	0.00	To acquire 51% of unlisted Hampton. Change of control. Approved.
Foreshadowed Offers
16/03/09	Asciano	AIO	Multiple expressions of interest	0.00	Interest for parts of business/recapilisation.
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.
03/02/09	Felix Resources	FLX	Several expressions of interest	0.00	Discussions continue.
09/02/09	Gold Aura	GOA	Anomaly Resources	0.00	Discussions.
01/04/09	Polartechnics	PLT	Unnamed company	0.00	Non-binding MOU.
16/03/09	Progen Pharmaceuticals	PGL	Cytopia	5.00	Cytopia seeks removal of board.
04/02/09	Redflex Holdings	RDF	Unnamed parties	0.00	Unsolicited indicative proposals - still inadequate.
27/02/09	Ventracor	VCR	Two unnamed parties	0.00	Discussions continue.
30/12/08	Vision Group	VGH	Several unnamed parties	0.00	Non-binding conditional offers.

Source: NewsBites