Coal fires M&A

Whitehaven and Aston looks like a merger of equals, but not all is as it seems.

PORTFOLIO POINT: A special dividend for Whitehaven shareholders is presumably to encourage them to back the 'merger of equals’ with Aston.

Whitehaven Coal (WHC), Aston Resources (AZT). We now have an answer as to why Nathan Tinkler was tinkering with the Aston board after it announced a merger with Whitehaven Coal today to create the largest listed coal company in Australia.

On the face of it, everything looks quite good for Aston: it’s a scrip merger and as the junior partner Aston shareholders get 1.89 shares for every Whitehaven share. At the close on Friday these were worth $5.82, giving Aston shareholders what looks like $11 a share and a 13% premium.

But all is not as it seems.

It’s supposed to be a nil-premium deal, or a merger of equals, so where is that 13% coming from? The detail is in a 50¢ a share special dividend for Whitehaven shareholders, through in presumably as a sweetener to encourage any recalcitrant shareholders to drop their vote in the “yes” box.

You’ve got to strip this out of Whitehaven’s share price so the value becomes a multiple of 1.89 by $5.32 instead of $5.82. This gives you a value of $10.05, which is only 3% above the Aston price on Friday and far more representative of a nil-premium deal.

There aren’t many things that could derail the merger, but a counter-bid could. Given the rapidly increasing popularity of coal and that both companies have a mix of thermal and coking coal (one used for fuelling those all-important power stations and the other for making steel), it’s not inconceivable that another bidder might enter the fray for either. However, Whitehaven, at least, has been picked over fairly thoroughly during the long-running attempt to sell itself that only finished at the start of this year, so the most likely outcome is that the merger goes ahead.

Another issue that could derail it is the terms of the sale of Tinkler’s Boardwalk Resources into the company. This is a separate transaction, but all aspects of the deal are conditional on each other. You could also see some push back if the terms are overly favourable to Tinkler.

Extract Resources (EXT). There’s been some more concrete movements in uranium stock takeovers in the past week as China Guangdong National Power Corp (CGNPC) launched its much anticipated bid for Kalahari Minerals. But the best thing about it is the fact that CGNPC didn’t try to shirk its duty by Extract, which I’ll explain shortly.

CGNPC is offering 243.55 pence per share for Kalahari, which translates into a bid for Extract of around $8.65. The offers are conditional on CGNPC gaining 50% acceptances from Kalahari shareholders and there being no adverse changes to Extract’s mining licences by the Namibian government.

It is Kalahari’s 43% stake in Extract that is the reason why CGNPC must make a bid for it: under Australian takeovers law any bidder for a company with a large stake in another must make a follow-on bid for the second one, too, because this protects smaller shareholders from not receiving a premium for their stake when there is a significant change of control.

CGNPC could quite easily have ignored the rule because it’s not listed in Australia and Kalahari’s main assets (including its 43% stake in Extract) are all in Namibia. There is little the ACCC and Foreign Investment Review Board could have done to force CGNPC to make the offer. I guess they could have refused to process the transfer of the shares in Extract that Kalahari owns to the Chinese company, but not much else.

Now, however, it’s all “wait and see”. I’ve spoken about this situation a few times since it fell through after the near-meltdown at Japan’s Fukushima power plant killed the first deal off. It’s risky: not only is it a Chinese bidder (they are notorious for pulling out at the first sign of trouble) but one that has already called off the bid once after it wasn’t allowed to lower the initial 290 pence offer. It’s also in Africa (Namibia is where Kalahari’s assets are), which is a tricky place to do business.

CGNPC is back for a second bite and they look pretty solid from this position, but we’ve seen deals involving these kinds of players before – just look at Flinders Mines below – and there is still a long way to go before Extract is looking good enough to try and play this deal.

Flinders Mines (FMS). Trouble has struck the takeover of Flinders Mines as Russian bidder Magnitogorsk Iron and Steel Works has had its Australian assets frozen in an unrelated lawsuit with its biggest iron ore supplier.

Both companies say the legal action won’t prevent the 30¢-a-share takeover going ahead, but it’s not a good look.

You’ve got to look at the quality of the bidder: iron ore miner Flinders Mines operates in a good sector but Magnitogorsk Iron and Steel Works is not of the highest quality, it’s got a legal action against it and should the iron ore price drop, it may pull out of the deal (Russian companies do have some form in that area).

And even though Citigroup may think financial crises in Europe and the US will take the edge off prices but not ore volumes (see Take a bow, Australia), I don’t see this having a flow-on effect in resources takeovers – perhaps even the opposite.

The price paid for resources is balanced by volume: if everyone decides to increase the volume they produce, such as is happening in iron ore right now, prices will fall. Companies like Magnitogorsk Iron and Steel Works are buying miners because owning the mine is a far better option when prices are high. It may be that once prices start to fall these precautionary takeovers halt or bidders pull out of current processes because it’s cheaper just to buy the ore straight from suppliers again. Remember that both BHP Billiton and Rio Tinto bosses have said they expect lower prices in the future.

Iron ore is a hot sector so I think there’s a good chance Flinders Mines will see another bidder pop up, but I’m nervous about the Russian one that’s here now. The deal doesn’t close until March next year and that’s a long time for something to go wrong.

Flinders Mines’ share price has come back up to 28.5¢ after falling when news of the law suit broke, so what I’d recommend is to sell half your stake now and take some profits, and hold on to the other half in anticipation of a counter bid or Magnitogorsk Iron and Steel Works following through on its side of the deal. But remember that if it doesn’t, Flinders Mines shares are going to fall dramatically.

Austar United Communications (AUN). The signs are looking good for Foxtel and its $1.52 bid for Austar.

The ACCC has had a few setbacks in court (Metcash is one, Google was another) and I believe it’s going to have to swallow its pride with the NBN and Telstra and let that through too. On top of this I think you’ll find that its opposition to Austar isn’t going to stack up.

The crucial fact here is that Austar has released its scheme booklet. It went to the Federal Court – which in itself says that Austar doesn’t believe the ACCC will win in its opposition to the deal – and gained approval to send the offer documents out. It costs a lot of money to do that and Austar wouldn’t have gone to the expense if they didn’t think it was worth it.

Spotless (SPT). Is the Spotless board being pushed into being taken over or is it leading Pacific Equity Partners (PEP) to the right price? It’s hard to know, but what we do know is that there is incremental movement towards a point where all parties might be able to agree.

PEP lifted its offer by 5¢ to $2.68. This isn’t going to get a board recommendation any time soon, but it does show that the bidder is still interested and it did convince the Spotless board to open a data room.

The board had to do something, though: I’ve spoken to a few shareholders and they say there is immense pressure behind the scenes for the board to engage with PEP rather than just ignoring them. The fact they’ve opened a data room shows they’ll probably entertain offers now, but whether they get the price they want (which I suspect has a “3” at the front of it) is up in the air and this is why Spotless’s share price is languishing at $2.38 as of the Monday close.

I think if they recommend a certain price you might see some other bidders for the company, but at the moment no one wants to bid against an unknown factor. And whether PEP can come up with the right price is hard to say, but it’s turning into a more favourable situation now and is trading at a 11% discount to the informal bid.

Insurance Australia Group (IAG). An intriguing rumour has popped up around IAG: the idea that Wesfarmers might be sniffing around for a takeover.

Wesfarmers is usually mentioned in the same breath as Coles, and maybe Bunnings, but what people forget is that it has quite a substantial coal business and a small insurance one, too.

Within Wesfarmers I think there is a view that they have to get out of insurance or get bigger, and this is where IAG comes in: it’s the only real insurance takeover target available in Australia. QBE is quite complicated now after making so many acquisitions itself, and RACV is still a cooperative and doesn’t have that corporate structure, so IAG is the obvious choice.

IAG has also received a bid in the past. It was a scrip offer from QBE in 2008 that valued the insurer at $4.20 a share. IAG knocked that one back so any bid now would have to be higher – notwithstanding the fact that the world is a different place now and it would be hard for anyone to justify an over $4 offer when IAG only closed today at $3.13.

Wesfarmers shares have been a little weak since the rumour started while IAG’s have strengthened, so the speculation has some currency, but that’s all it is. I think a takeover is possible, by Wesfarmers or someone else, but not necessarily right now.

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

-Takeover action, December 5-12, 2011
Date Target
ASX
Bidder
(%)
Notes
7/12/11 Adelaide Energy
ADE
Beach Energy
93.78
Ext to Jan 9
23/11/11 Anvil Mining
AVM
Minmetals Resources
40.10
Lock up deal on 40.1%. Ext to Dec 9
30/11/11 Contango Capital Partners
CCQ
Contango Micro Cap
71.13
08/12/11 Gold One International
GDO
BCX Gold Investments
57.36
Unconditional
21/11/11 Laguna Resources
LRC
Kingsgate Consolidated
97.06
18/07/11 Mintails
MLI
Seager Rex Harbour
37.33
08/12/11 MSF Sugar
MSF
Mitr Phol Sugar
22.01
08/12/11 National Hire Group
NHR
Seven Group
98.71
24/11/11 NSX
NSX
Financial & Energy Exchange
50.53
Unconditional
14/10/11 Signature Metals
SBL
LionGold
19.90
12/05/11 Sphere Minerals
SPH
Xstrata
75.29
Unconditional
Schemes of Arrangement
12/12/11 Aston Resources
AZT
Whitehaven Coal
19.99
Vote late Mar
08/12/11 Austar United Communications
AUN
Foxtel
0.00
Vote Feb 17
01/12/11 Bow Energy
BOW
Royal Dutch Shell/PetroChina
0.00
Vote Dec 21. Cleared by ACCC
29/08/11 Auzex Resources
AZZ
Bullabulling Gold
0.00
See GGG Resources - 50/50 merger
25/11/11 Flinders Mines
FMS
Magnitogorsk Iron and Steel Works
0.00
Vote Mar 1
29/08/11 GGG Resources
GGB
Bullabulling Gold
0.00
See Auzex Resources - 50/50 merger
01/11/11 Souls Private Equity
SOE
Washington H Soul Pattinson
13.36
Vote Dec 14
11/10/11 Sundance Energy
SDL
Hanlong Mining Investment
17.99
Reverse Takeover/Scheme
05/12/11 Bondi Mining
BOM
World Titanium Resources
0.00
WTR to nominate 8 out of 9 directors. Vote Jan 5
Backdoor Listing
14/09/11 Consolidated Steel
CGQ
CFT Holdings (HK)
0.00
12/08/11 Millepede International
MPD
Cool D'Fine
0.00
Marine HVAC provider. Vote mid-Nov
Foreshadowed Offers
27/09/11 Bannerman Resources
BMN
Sichuan Hanlong
0.00
Conditional proposal. Talks continue
05/10/11 Charter Hall Office REIT
CQO
Macquarie Capital consortium
0.00
Indicative offer. Further due diligence
10/08/11 Cooper Energy
COE
Unnamed parties
0.00
Preliminary talks
29/09/11 CSG
CSV
Unnamed party
0.00
Indicative offer
07/10/11 CSG
CSV
Other unnamed parties
0.00
Expressions of interest
17/10/11 Customers
CUS
Unnamed party
0.00
Non-binding discussions
08/12/11 Endocoal
EOC
Unnamed parties
0.00
Unsolicited approaches
05/10/11 New Hope Corp
NHC
Unnamed parties
0.00
Proposals invited
06/06/11 Pulse Health
PHG
Unnamed party
0.00
Expression of interest
01/12/11 Spotless Group
SPT
Pacific Equity Partners
19.64
Revised proposal

Source: News Bites