Closing the door on Dulux

Dulux has upped its bid for Alesco, but some investors won’t get the full advantage and now could be a good time to sell.

PORTFOLIO POINT: Dulux has upped its bid for Alesco, but some investors won’t get the full advantage and now could be a good time to sell.

Alesco (ALS). Dulux (DLX) got on the front foot this morning and has increased its bid for Alesco. While I would normally say this is a good thing, there are a few issues here clouding the picture for investors – and it looks like it’s time to sell.

The original bid was $2 a share, and Dulux has announced an increase to $2.05 a share in cash plus up to 18c of franking credits. This means that if Alesco’s board announces a fully-franked dividend of up to 42c, then this amount will be subtracted from the $2.05 offer but the franking credits won’t be. The effect of this is to give certain shareholders who can utilise the franking credits – but not all shareholders – a bid worth up to $2.23. That is the minimum of the threshold ($2.23 to $2.52) from the independent valuation Alesco’s board provided.

There are a few issues here, other than that Alesco’s results are due to be released tomorrow and I’m a little surprised Dulux didn’t wait for those. First, the new bid is only 5c extra cash, or 2%. Secondly, franking credits just aren’t valued the same as cash in hand. Not all shareholders can make full use of them, so the share price is not going to trade up to $2.20. Alesco briefly touched $2.07 today, and closed at $2.03. Dulux is trying to get up to the board recommendation level without actually having to pay for it.

Then the bid has been declared final in the absence of a higher competing offer, and – here’s the kicker – the Alesco board has apparently already rejected the revised offer. The chances of someone else coming in and having a go at Alesco are very small. Dulux is a natural buyer of this group and there wouldn’t be too many others, especially in the current construction environment.

I’m concerned with these developments that the bid will not get up at all. Dulux could choose to lower the acceptance condition to 50.1%, from 90%, but it has not yet said it will. Dulux won’t get 90% without the target board recommending the offer. What’s more, the franking credits are of dubious value. If Alesco isn’t going to support the offer then they’re presumably not going to declare a 42c fully franked dividend either.

Taking all this into account, I think it’s time to sell on market. Straight away.

I don’t think the share price is going any higher, and this entire deal could fall over now. There’s every chance Alesco will just stay listed, with Dulux on its register as a 20% shareholder after some of the institutional acceptances are withdrawn. It’s not a great result, but it’s clear to me what the correct outcome is – and that’s not to accept the bid, but sell on market now.

Whitehaven (WHC). As I wrote last week, Whitehaven shares are trading well below the $5.20 bid price, and have been steady around $4 since Nathan Tinkler and his consortium lobbed the bid. However, it’s not rock solid and I would still stay cautious.

The market is sceptical as the bid is subject to Tinkler getting roughly 63% of shareholders to swap their publically listed shares for private shares, and find financing for the remaining 37%. He’s already convinced about 48% of the company to go along, and I’m not saying he won’t raise the money, but in the current market I just don’t know.

This latest roll of the dice by Tinkler, who’s turned a million dollars into almost a billion dollars just buying and selling coal assets, might really define him as an investor. But it could also be top-of-the-cycle, and coal prices have come off lately. It’s not a rare asset.

If it was a fully-funded bid, and if he had convinced the other 16% of shareholders to come along with him, you would jump on it. And I hope Tinkler does get it. But if the deal fell apart and the stock fell back to $3.45, that’s a downside of about 15-16%. If it goes ahead, that’s an upside of close to 30%. I admire Tinkler for what he’s done, but I think it’s more likely a loss of 16% than a gain of 30% in the current market.

Hastings Diversified Utilities Fund (HDF). The Australian Competition and Consumer Commission (ACCC) has cleared APA to take over Hastings, given certain undertakings, which surprised a lot of people. While APA may come back now and lift its original bid, and the market certainly thinks so, it’s a little pricy at the moment given the circumstances.

APA’s current bid is worth about $2.08, or probably a bit less depending on its own share price since it’s mostly scrip. There’s an all cash bid from a Canadian group, PPA, at $2.325 a share and this has board approval absent a higher bid. The market has pushed the Hastings share price up to close at $2.4xx today, assuming APA will increase its bid now it has approval.

APA is a keen buyer here, and I’ve seen analysis suggesting it could pay $2.70, $2.80, and one even said $3 while still being profitable for the bidders. But I think the market’s pushed it a bit much at the moment. At $2.50, a lot of the potential profit in the deal has already been predicted and with infrastructure assets it’s rare that competitors can just keep bidding up because they’ve got a defined rate of return. You can’t just pay any price.

This is a situation where I would buy on a pull-back to have a good chance of making a profit – closer to $2.40 where you’re paying roughly 3% above the bid. Remember, it’s not easy for APA to increase its bid which is 75% scrip, and APA would have to really come over the top to compete with PPA’s all-cash bid. At current levels, I’d be inclined to wait.

Spotless (SPT). On a more positive note, the shareholder vote for Spotless’ takeover by PEP is this Wednesday and the court hearing is Friday. The last day the stock will probably trade is Friday.

You’ll get $2.66 on this, plus maybe 1.5c in franking credits, and it closed today at $2.635, so the gains there have pretty much been eked out. It’s good, though, to see a large takeover go through and essentially get done. Here’s a situation where the board initially said ‘no’, but then accepted a bid despite it being lower than originally desired.

This is in direct contrast to what Alesco is doing – flatly rejecting a slightly increased offer. In the current environment I just think that boards rejecting bids is not a good idea. Spotless is a good illustration of a deal that got done, and why investors should be wary of Alesco’s opposition. 

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

-Takeover Action July 16-July 20, 2012
DateTarget
Code
Bidder
(%)
Notes
09/07/2012Alesco
ALS
Dulux Group
29.93
29/06/2012Austock Group
ACK
Mariner Group
0.00
16/07/2012Castlemaine GoldfieldsCGTLion Selection24.70
20/07/2012Genesis Resources
GES
Clancy Exploration
9.56
Ext to Aug 20. Uncond.
15/05/2012Hastings Diversified
HDF
APA Group
20.71
Closing Jul 15
18/07/2012Hastings DiversifiedHDFPipeline Partners8.10
24/05/2012Minemakers
MAK
UCL Resources
0.00
13/07/2012Norton Gold Fields
NGF
Zijin Mining Group
16.98
11/07/2012Orion MetalsORMConglin Investment Group   68.90
29/06/2012Real Estate Capital Partners USA Property Trust
RCU
Woolley GAL II
32.81
Incl associate's holding
12/07/2012Rocklands Richfield
RCI
Shandong Energy
51.10
Pre-bid agreement
04/06/2012Thakral Holdings
THG
Brookfield Asset Management
38.58
Schemes of Arrangement
16/07/2012Q Technology GroupQTGGWA Group0.00Terminated
15/06/2012Spotless Group
SPT
Pacific Equity Partners
19.64
Vote Jul 25
22/06/2012Sundance Resources
SDL
Hanlong Mining Investment
17.99
To complete Nov 2012
Foreshadowed Offers
23/07/2012Beach EnergyBPTOrigin Energy0.00Rumour in media
21/05/2012PMPPMPTMA Group0.00Non-binding indicative offer
13/07/2012Whitehaven Coal
WHC
Tinkler Group
48.30
48.3% in shares expressed

Source: News Bites

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