DataRoom AM: Telstra's bitter pill

Telstra's sale of Sensis for such a low price will likely leave a bad taste in shareholders’ mouths, while Fusion Retail dismisses talk that it may look to float in the near term.

Telstra Corporation shareholders have reason to feel aggrieved at the lowball price the company received for its struggling directories business. It may be the wise way to cut its losses, but it is no elixir for the mistakes of years’ past.

Elsewhere, Saputo creeps further up the Warrnambool Cheese and Butter register, Asciano Ltd and Whitehaven Coal extend a rail haulage agreement, the owner of Colorado rules out an IPO, Thiess signs an iron ore mine operations contract and Japan’s Suntory Holdings pays $15 billion to purchase the owner of the Jim Beam alcohol brand.

Telstra Corporation, Sensis, Platinum Equity Partners

Telstra Corporation has conceded defeat on its diamond-turned-quartz directories business, Sensis.

Yesterday, we expressed doubt about the prospect of Telstra receiving $3 billion for the company, though we didn’t anticipate the deal being quite as disappointing as the one revealed yesterday.

The company will retain the voice services division of Sensis while offloading 70 per cent of the remainder for $454 million to Platinum Equity Partners. In all, the deal values the entire group at around $1.1 billion.

Telstra spruiked the deal as being 2.4 times projected earnings for the current financial year, but on the most recent earnings, it was a ratio of just 1.9 times. Regardless of how you look at it, and even knowing the business is in freefall and such multiples are not uncommon in the directories space, it is not a deal Telstra should be shouting from the rooftops.

However, it appears the perfect deal for Platinum Equity, which should recoup its investment in a few years’ time and can then hive off what it hopes will be a more stable business. It won’t be an easy journey, particularly not for Sensis employees, but expect Platinum to walk away with a tidy profit by the end of it.

Meanwhile, Telstra is glad to rid itself of what has been an underperforming business for several years.

One thing heavily discussed is the notion of the move being an admission from Telstra’s management that is doesn’t have the executives capable of executing a turnaround at Sensis.

This is considered by some as a good reason to sell – that is, they don’t have the management capabilities so it’s wise to offload the business.

That argument, however, appears rash.

If the executives Telstra employs at Sensis aren’t capable enough, it should hire some who are able to get the job done.

Simply put, Telstra doesn’t want to put much more time and money into the business and has cut its losses as a result (the deal will see it lift cashflow to tune of $454 million, though record a $150 million accounting loss due to a change in the carrying value of Sensis).

The big question asked has been why didn’t the company sell pre-GFC when it could have received anywhere between $10 and $15 billion? It’s easy in hindsight and indeed, that isn’t the biggest issue.

The question that should have been asked was: why did it take until 2011 for the company to realise the massive impact of the internet on its business?

The company was too late to adjust to a changing environment as it desperately clung onto previous profit-generating machine that was print advertising. And given the comments we posted yesterday from former Telstra boss Sol Trujillo – which said Sensis was “more relevant” than Google in Australia – one can’t help but wonder if arrogance had a little to do with it.

Regardless, it’s been a bad five years for Telstra’s Sensis outfit and no matter how it spins it, yesterday’s sale does little to erase the bitter taste in shareholders’ mouths.

Fusion Retail, Colorado, IPO market

The IPO market has yet to gain traction in 2014, but it remains very early days in what is tipped to be a year where momentum from the last quarter of 2013 is continued.

One company that won’t kick-start an IPO boom is Fusion Retail, which has dismissed any expectations it may look to float in the near term.

Fusion, which owns the Mathers and Colorado brands, had been the subject of float rumours, but says it is too early in its turnaround to consider taking the company to the ASX.

“We're still focused on turnaround, and we'd need a lot more progress to be made in all the businesses before we could be in that position, which would be many years down the track, I would think," Fusion boss Don Grover told The Australian.

Fusion was spun out of the collapse of Colorado Group in 2011, with brands including Williams, Diana Ferrari and Jag.

As part of Fusion’s plans to return from the financial abyss, Colorado has ceased selling clothes, closed retail outlets and focussed entirely on selling shoes online. The group has also sold its Jag brand.

Warrnambool Cheese and Butter, Saputo, Murray Goulburn

Warrnambool Cheese and Butter suitor Saputo has further strengthened its leadership in the race for the Victorian dairy firm, lifting its stake from 21.4 per cent to 26.4 per cent on Friday.

The significant one day lift, announced yesterday, was no doubt a flow-on effect from its decision to delay an announcement on whether it would extend its deadline for the deal.

It leaves the Canadian dairy giant as the largest shareholder by a significant margin and shows just how valuable Bega Cheese’s 19 per cent stake will prove, should it be able to acquire it before the final deadline on January 22.

Should Bega decide to cash in its chips, Saputo would be less than 5 per cent away from a majority stake that would largely render Murray Goulburn’s bid redundant. Bega, however, appears in no rush to make a decision on its stake.

Asciano Ltd, Whitehaven Coal

Miner Whitehaven Coal has agreed a new deal with Asciano Ltd’s Pacific National Coal over rail haulage.

The new arrangement will come into effect this month and last through until June 2026.

The deal replaces a previous agreement between the two; with per tonnage haulage costs reduced as the length of the deal is extended.

With both sides gaining a key benefit, it’s no surprise that Pacific National Coal described it as a “win-win” deal.

Leighton Holdings, Thiess

Leighton Holdings subsidiary Thiess has announced the signing of a new three-year iron ore services contract at a mine in the Northern Territory.

The $135 million deal will see Thiess offer services to Western Desert Resources at its Roper Bar project.

Thiess has been fostering a relationship with Western Desert by offering project support to the mine since November.

Suntory Holdings, Beam

Japanese beverage group Suntory Holdings has made the biggest acquisition in the world this year, spending $US13.62 billion ($A15 billion) to purchase US-based Beam.

The massive deal is a good sign for the long stagnant global mergers and acquisitions sector as we transition to the new year.

Should regulatory clearance be granted and Beam shareholders approve the takeover, Suntory will claim the global brands of Jim Beam and Maker’s Mark.

The deal is to be done at around a 25 per cent premium to last Friday's trading price of Beam shares in the US.

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