Clearview bid has unclear outcome

PORTFOLIO POINT: A higher offer for Clearview is welcome, but an even higher one may be needed based on the current share price.

Clearview (CVW)

The bid for financial planning company Clearview Wealth got more interesting this week, as Crescent Capital Management increased the bid from 50c to 55c a share. Normally I would say “That’s great, because that’s a 10% increase”, but the problem is the stock was already trading above 55c.

When this bid first started and Clearview traded at 54c, I thought it was a bit rich. As it is, they’ve got 55c now, but the stock closed today at 59c. There’s a chance of another increase, but I would have thought the best it could get to is about where it is at the moment. It’s just trading too much above the bid for me to be comfortable with.

That said, I maintain this sector of wealth management and financial planning is going to be quite a big area for takeovers because it’s one of the few areas where the big banks are allowed to make acquisitions. My favourite target in the space is IOOF (IFL) and of course IOOF itself is bidding for a company called Plan B (PLB) at the moment. This is definitely a space to watch.

Alesco (ALS)

The bid from Dulux (DLX) has just reached an absolute impasse. The problem is that the Alesco board, having rejected the bid originally saying they couldn’t possibly afford a 42c dividend, are now trying to come back a couple of weeks later and say ‘how about a 75c dividend?’

It’s all pretty silly, and the Takeovers Panel wants truth in takeovers to be a genuine policy, so I think what’s going to happen here is that Dulux will just keep extending the bid until it gets to 50% ownership. Then Alesco will have no choice but to agree to the bid that’s on the table.

That means the risk here is that Dulux doesn’t get to 50% because there are a lot of retail shareholders, and that the bid falls over. So my advice here would still be to sell. You will not get any more cash, that is certain; What you’re hanging on for is some possible franking credits.

The stock is trading above the cash terms of the bid at the moment – in the mid-$1.90s for a $1.90 cash component since 15c of dividend has already been paid. You’ve got several cents of real cash downside, and your only upside is some franking credits which not everybody can use.  I don’t think it’s one to stay in.

Hastings Diversified Utilities Fund (HDF)

This stock is trading very strongly, and even though there haven’t been any more bids, it’s traded up simply because the share price of mostly-scrip bidder APA has gone up.

There’s some speculation in the press that although PPA is letting its bid lapse, one or two of the bigger entities within the PPA consortium might form up with some different partners and launch another bid. It’s an interesting part of takeover law where if there’s a consortium, and some of the consortium members change, is that a new consortium? And is it bound by whatever the old consortium said? There’s no clear law on this.

So it’s not impossible that there could be another bid. Every day that goes on it’s less likely, but it’s not impossible. I still think HDF is worth buying, even up at the $2.68 where it closed today, because it’s only trading at a tiny premium to what the bid is worth.

There is a ceiling, and you never quite know what it is with these pension fund infrastructure-type bids, because it’s all based on discounted cash flows, but I think it’s worth just hanging in there on the outside possibility. At best it’s a 25% chance of another bid, but there’s very little downside because it’s underpinned by the rising APA share price.

Billabong (BBG)

I’m only hearing bad things about this. The company keeps back flipping on what it wants to do, and my fear now is that TPG just walks away.

Due diligence, if rumours are to be believed, hasn’t even really started yet.  They’re apparently still haggling over confidentiality and things like that. If TPG walks, then the shares will trade lower and as it is they’re trading at $1.315, below the bid of $1.45. If TPG definitely walks away, the stock will drop 15-20 cents.

There’s some press speculation that Bain might be looking at it, but I like to focus on what’s actually there, not on what who might. Speculating on private equity bids I think is a mug’s game.

Whitehaven (WHC)

Whitehaven, as I mentioned last week, is definitely not happening.

The stock fell a lot on the first day, down to roughly $2.80 at one stage, but it’s since recovered. People are now looking at it purely based on fundamentals, but remember it’s well below the $5.20 bid price at $3.22 where it closed today.

As with iron ore companies at the moment, the market has not been kind in terms of coal prices and whatever one thinks is the fundamental value of a coal stock, I suspect it’s gone down rather than up in the last month or so.

As to future M&A activity in the industry, look at who can buy. If coal companies want to buy each other and bid for their shares, everybody’s shares have been weakened to differing degrees so it doesn’t necessarily stop that. It doesn’t mean that takeovers won’t occur – if anything they’re probably more likely to occur now because people in the coal industry are eternally optimistic – but the prices paid will be lower and Whitehaven is an example of that.

Graincorp (GNC), Goodman Fielder (GFF)

GrainCorp announced last week that it was buying Integro, Goodman Fielder’s oils and fats business. This is a notable deal because GrainCorp is one of my favourite takeover targets.

GrainCorp’s earning picture is really good at the moment. Australia is having good weather, good crops, and international wheat prices are on the rise because of droughts in other parts of the world.  Goodman Fielder on the other hand is really a collection of manufacturing plants and brand names, and it’s been squeezed by rising raw material prices and falling consumer prices. So Goodman Fielder is on a path of having to sell non-core assets.

Does it make GrainCorp less of a takeover target? No, not really, GrainCorp is still a very attractive business. Does it make Goodman Fielder a takeover target? No, not really. The problem with asset sales is you tend to sell off your best bits; you sell the things that can be sold.

As a takeover target, I maintain GrainCorp is a very attractive collection of assets and businesses, and it may well be that there’s a good entry point thanks to the share price falling a bit due to a capital raising.

Exco Resources (EXS)

Finally, there’s a good buying opportunity in Washington H Soul Pattinson’s (SOL) bid for gold and copper miner Exco.

The 19c-a-share bid has been called “inadequate” by the target board, and the offer has not yet been declared final. Soul Patts has 20% of Exco, after major shareholder Ivanhoe Australia sold a third of its stake to it, but there is still a buying opportunity at 19.5 to 20c a share on the chance of a sweetened offer.

Exco closed today at 20c.

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