Don't rule out a Rio bid

Rio Tinto. Is there a bid for Rio Tinto? I wouldn’t rule it out. Remember Rio denied that it had received a takeover offer but that doesn’t mean anything because if a bid’s hostile then they’re not going to know about it. The press reports said the bid could be $110 a share; I've heard speculation as high as $120 a share

Interestingly, BHP Billiton has not denied anything so it’s not impossible. After the rumour hit the markets Rio briefly touched $99 a share. They’ve drifted back to about $92, $93.

As Alan Kohler reports in today's lead story, resource companies at the moment have very low levels of debt, very strong cash flows and very low price/earnings (P/E) multiples.

Both Rio and BHP trade on forward P/Es of between 7.5 and 10 times, depending on your view of profits and metal prices. So prima facie the sector looks attractive.

Having said that, the market is very driven by rumours at the moment and speculation often can have no basis in reality, yet these rumours are capable of moving the market to the tune of billions of dollars, as the Rio rumour did.

A bid for Rio would not surprise me, but there would be some anti-trust issues in any combination of those two companies It's always possible that someone else is looking at the miner..

Alinta. I don’t think Babcock & Brown’s offer, which some say is worth $16.40 depending on franking credits, is the end of the Alinta story. I think there’s a better than even chance that Macquarie might have one more go at this. It was distracted by the Qantas bid, and its reputation was dented, so I don’t think they’ll let this one slip.

Macquarie and Babcock & Brown are clearly finding it difficult to pay too much more for Alinta, hence the high proportion of scrip in both deals. No one wants to say, 'Here’s $17 a share cash’, because it’s probably not worth that much. It is trading below $16, and I think it closed about $15.50 on Friday, so if you buy now the downside is limited.

You’ve got a recommended bid on the table and you’ve got the possibility that Macquarie will have one more go at it, but just be aware: if you do hold Alinta stock and you end up accepting the Babcock & Brown offer, you’ll end up with some cash and shares in a variety of other listed vehicles, which may not be all that liquid.

If you have Alinta stock, I’d be holding on to it. Why not? The downside’s negligible and the upside’s still there.

Coles. In its pursuit of Coles, Wesfarmers has done one smart thing and two dumb things. The smart thing was that it bought a stake.

The dumb things were that it then tried to buy another stake at a higher price and it botched the offer and didn’t pick up a single share. This was at $17.25. It played its hand a bit too early.

Not only did it fail to get any shares, but it put the Coles board offside. The board had said it would not allow Wesfarmer into the “data room”, which contains information about Coles’ operations, unless it promised not to buy any more shares for the time being. The board did not want Wesfarmers holding so much stock it prevented another bidder entering the fray.

Wesfarmers did not sign the agreement, then failed to get any more shares. As a result it’s been frozen out of the data room and has Kohlberg Kravis Roberts as the potential under bidder. Let’s remember that KKR already knows a lot about Coles because it was prepared to bid both $14.50 a share and then $15.25 a share last year. It’s being allowed unfettered viewing of all Coles data.
Now the big issue with KKR is whether it is just them with other private equity firms, or whether it will team up with a listed company, the most obvious contender being Woolworths. Obviously, Woolworths is not allowed to look at the Coles supermarket and liquor data because they’re the two biggest competitors in the country and the ACCC wouldn’t allow that, but Woolworths, I believe, is mainly interested in Officeworks, Target, those sorts of businesses.

KKR, I think, is interested in the supermarkets and liquor business, so again you’ve got two bidders with plenty of money. Wesfarmers is not in the data room but it does own almost 13% of the company. KKR has plenty of financial firepower. It may team up with Woolworths. I think it’s a very interesting situation and if you’re a shareholder in Coles you hold on and see what happens.

Wesfarmers has built up a lot of retail knowledge through its Bunnings hardware chain. It’s not impossible, but I think it’s less likely that it would seek to team up with Woolworths.

If Wesfarmers does want access to the data room, they’ll just have to sign an agreement with the board and, no one’s going to sell Wesfarmers any more shares now because it’s not in any major shareholder’s interest to give Wesfarmers too much control of the company and lock out KKR.

If you’re a big institutional shareholder in Coles you want to see competitive tension in the bidding process so people sold some of their shares to Wesfarmers to kick the process off, but now you don’t want to sell any more shares unless someone comes in with a real knockout offer and $17.25, which is what Wesfarmers bid a week and a half ago, was not high enough.

Qantas. Will there be an bid for Qantas? Certainly Airline Partners Australia has said in the press that it’s considering another offer and it would make sense. It could just launch another bid at the same price – $5.45 – with the same players. After all, it was a technicality that tripped the last one, even though Airline Partners said it had the required 50% to extend the bid.

The Qantas board has now said it would no longer recommend such a bid, but I struggle a bit with that because if it was prepared to recommend the last one at the same price, why not this one? And it seems that the board has had a bit of a rethink and I still think there’ll be some heads to roll. I think chairwoman Margaret Jackson is under enormous pressure because she implied that shareholders who didn’t accept $5.45 were stupid.

Now she’s saying she wouldn’t recommend $5.45, so there’s clearly been a conversion on the road to Damascus there. The issues with the Federal Government – Peter Costello has made it clear that there’ll be no fast track, if they want to launch a new bid it goes through the whole Foreign Investment Review Board process, etc, etc, and then you start running up against the federal election. So it seems to me for the time being a new bid is probably unlikely.

However, the company shares haven’t really fallen that much, but on the negative side there’s a lot of big hedge funds like Heyman, he owns 10% and what are they going to do? If they decide they just want out and they head for the doors then that could cause a price setback. Then again there’s a lot of Australian institutions who are saying you know what? It’s a good long-term buy and they’re presumably the ones buying in the market. But if you’re in it for the bid, I think it’s fair to say that the current bid is over. It’s still an airline. It’s still a difficult business.

Healthscope / Symbion. Healthscope has launched a bid for Symbion at $4.30 a share. Symbion was originally the spin-off from Mayne Group, Mayne Parma. It’s been a takeover target for some time. Ed Bateman’s Primary Health Care launched a bid last year, an aborted bid, at about $3.50 a share, which was rejected. It was a low-ball bid even at the time given that Symbion was trading for about $3.65.

But Bateman has a curious apprach. Sigma Pharmaceuticals, which is an obvious counter-bidder, has not ruled out entering the game. There’s also Ramsay Healthcare although some people think Ramsay is itself a takeover target.

The pathologists who work for Symbion have said that they don’t want to go with Healthscope. They might not have much choice and, of course, this raises the spectre of what happened with Mayne Hospitals years ago when they upset all the doctors that worked there and they all just went to other hospitals, so I think you can buy the stock below the bid. The only thing is the $4.30 a share bid is cash and script – we don’t know the exact terms of it. The board has said it would probably recommend it, but I think, you can buy it slightly below that price and you’ve got the possibility of other people bidding for the company as well.

Disclosure: Carnegie Wylie & Company, a shareholder in Eureka Report, is an adviser to Alinta, Coles and Qantas.

nTakeover Action May 7-11, 2007
Date	Target	ASX	Bidder	(%)	Notes
22/12/07	Avantogen	ACU	Chopin Opus One LP	77.35
23/04/07	Bakehouse Quarter Fund	BQF	Pelorus Property Group	63.00	Closing May 25
10/05/07	Becker Group	BKR	Prime Television	22.68	Paul Ramsay Holdings, with 17.6%, will accept
2/03/07	Chiquita Brands S Pacific	CHQ	Timbercorp /Tradefresh	80.93
9/03/07	CCI Holdings	CHL	Bureau Veritas	19.90
8/05/07	Colorado Group	CDO	ARH Investments (Aust)	83.60	New offer for balance at $6.20
7/05/07	E*Trade Australia	ETR	ANZ Banking Group	72.00	Offer to acquire outstanding 65.8%. Extended to May 4
14/04/07	Eumundi Group	EBG	Axiom Properties	16.92
9/05/07	Iberian Resources	IBR	Tamaya Resources	64.64	Recommended offer. Closing May 31
24/04/07	K2	KTO	Tomahawk Energy	0.00	Closing May 23
26/03/07	Lionore Mining Int	LIM	Xstrata	19.00	Lock up agreement. Closing May 25
4/05/07	Lionore Mining Int	LIM	OJSC MMC Norilsk Nickel	0.00	"Superior to Xstrata offer."Closing June 18
17/04/07	Magna Pacific (Hdgs )	MPH	Lionsgate Australia	11.78	Closes June 15. Unconditional
26/04/07	Marathon Resources	MTN	Crosby Capital Partners	0.00	Closing date extended to July 4. Price increased from 68c to $3.52
13/04/07	OmegaCorp	OMC	Denison Mining Corp	33.18	Extended to April 13
13/04/07	OmegaCorp	OMC	Central African Mining & Exploration Co	20.00	Pre-bid arrangements for 19.997%
14/02/06	Orion Telecommunications	OTL	Toy Telco/Lewis Securities	8.89
6/03/07	Pacifica Group	PBB	Robert Bosch GmbH	72.45	Closing March 4
3/05/07	Queensland Cotton Hldgs	QCH	Olam International	15.27	Free of US Hart Scott Rodino (anti-trust) condition. Closing May 30
28/02/07	Queensland Gas	QGC	TCW/Societe Generale	0.00
10/05/07	Rinker Group	RIN	Cemex Group	10.50	Closing date extended to June 8. FIRB approval. Directors recommend higher offer
3/05/07	S8 Property Trust	SPR	MFS	99.04	Closed April 24
26/04/07	Shannon Resources	SHA	Carrick Gold	91.10
27/04/07	Sonnet Corp	SNN	Commoditel	0.00
8/05/07	Summit Resources	SMM	Paladin Resources	66.26	Summit announces strategic alliance with Areva. Extended to May 11
24/04/07	Sydney Roads Group	SRG	Transurban Group	84.15	ACCC not to oppose. Unconditional
19/03/07	Volant Petroleum	VOL	Sky Energy Investment / Karl Thomson Holdings	93.25	Unconditional
nScheme of Arrangement
11/04/07	Alinta	AAN	Babcock & Brown; Singapore Power		Vote mid-August
17/04/07	APN News & Media	APN	Independent News & Media consortium	41.61	Vote May 25
24/04/07	Bendigo Bank	BEN	Bank of Queensland	0.00	Bendigo Bank directors reject proposal
3/05/07	Bolnisi Gold NL	BSG	Coeur D'Alene Mines Corp	19.99	No vote date set
23/02/07	Consolidated Minerals	CSM	Pallinghurst Resources/AMCI		Vote May 2007
7/05/07	Evogenix	EGX	Peptech	19.99	Committed. Vote due August
10/05/07	Integrated Group	IWF	Programmed Maintenance Services		Shareholders approve. Court hearing due May 25
17/04/07	Macquarie Prologis Trust	MPN	Prologis	0.00	Vote mid-to-late June
13/04/07	Magna Pacific (Hldgs)	MPH	Destra Corporation	0.00	Heads of agreement
1/05/07	PowerTel	PWT	Telecom Corp of NZ	58.25	Suspended
20/04/07	Promentum	PPR	Pacific Print Group (Aust)		Suspended
13/04/07	Scarborough Minerals	SRB	MinSec BVI	0.00	Vote June
2/04/07	Veda Advantage	VEA	Pacific Equity Partners and Merrill Lynch Global Private Equity	0.00	Vote mid-June
nForeshadowed Offers
5/04/07	Coles Group	CGJ	Wesfarmers/Macquarie Bank consortium	12.80	Indicative scheme of arrangement offer
10/04/07	Coles Group	CGJ	Kohlberg Kravis & Roberts	0.00	Preparing for due diligence
12/02/07	Multiplex Group	MXG	Brookfield Asset Management and founding Roberts family	29.80	Discussions
16/04/07	Queensland Cotton Hdgs	QCH	Louis Drefyfus Cotton International	0.00	Willing to consider an offer
17/04/07	Southern Cross Bcasting	SBC	Macquarie Media Group	0.00	Continuing discussions
1/05/07	Symbion Health	SYB	Healthscope consortium	0.00
23/03/07	Viking Industries	VKI	Shareholder consortium		Conditional offer at $1.09. Formal offer expected mid-to late April
27/04/07	Warehouse Group	WHS	Woolworths		NZ Commerce Commission to decide on clearance for offer by May 25
27/04/07	Warehouse Group	WHS	Foodstuffs Co-operatives		NZ Commerce Commission to decide on clearance for offer by May 25
nBackdoor Listing
7/03/07	Australian Institute of Property Management	APM	Teys Group		Teys Group shareholders to acquire 29.1% and take over management. Subject to shareholder approval
16/04/07	Mark Sensing	MPI	Sonofax Holding	63.00